No one knows if they are older or wiser than you..
=)

The system restore feature is a useful - first appearing in Windows
ME and then sticking around for Windows XP.  It is only a useful
feature if you keep it maintained and use it to your advantage.
Remember that the system restore pretty much tells you in the name
what it protects which is 'system' files.  Your documents, your
pictures, your stuff is NOT system files - so you should also look
into some backup solution.

Whenever you think about it (after doing a once-over on your machine
once a month or so would be optimal) - clear out your System Restore
and create a manual restoration point.

'Why?'

Too many times have I seen the system restore files go corrupt or get
a virus in them, meaning you could not or did not want to restore from
them.  By clearing it out periodically you help prevent any corruption
from happening and you make sure you have at least one good "snapshot".
(*This, of course, will erase any previous restore point you have.*)

- Turn off System Restore.
  http://support.microsoft.com/kb/310405
- Reboot the Computer.
- Review the first bullet to turn on System Restore
- Make a Manual Restoration Point.
  http://snipurl.com/68nx

That covers your system files, but doesn't do anything for the files
that you are REALLY worried about - yours!  For that you need to look
into backups.  You can either manually copy your important files, folders,
documents, spreadsheets, emails, contacts, pictures, drawings and so on
to an external location (CD/DVD - any disk of some sort, etc) or you can
use the backup tool that comes with Windows XP:

How To Use Backup to Back Up Files and Folders on Your Computer
http://support.microsoft.com/kb/308422

Yes - you still need some sort of external media to store the results
on, but you could schedule the backup to occur when you are not around,
then burn the resultant data onto CD or DVD or something when you are
(while you do other things!)

Another option that came to my attention as of late:

Cobian Backup
http://www.educ.umu.se/~cobian/cobianbackup.htm

A lot of people have wondered about how to completely backup their system
so that they would not have to go through the trouble of a reinstall..
I'm going to voice my opinion here and say that it would be worthless to
do for MOST people.  Unless you plan on periodically updating the image
backup of your system (remaking it) - then by the time you use it
(something goes wrong) - it will be so outdated as to be more trouble than
performing a full install of the operating system and all applications.

Having said my part against it, you can clone/backup your hard drive
completely using many methods - by far the simplest are using disk cloning
applications:

Symantec/Norton Ghost
http://www.symantec.com/sabu/ghost/

Acronis True Image
http://www.acronis.com/homecomputing/products/trueimage

BootItT NG
http://terabyteunlimited.com/bootitng.html

System Restore is a very useful feature, but it's not a substitute for
backup. Besides the excellent point you mention, note that all it backs up
is the system, not your data files.

Here's my standard blurb on backup:

Almost everyone should be backing up regularly. It is always possible that a
hard drive crash, user error, nearby lightning strike, virus attack, even
theft of the computer, can cause the loss of everything on your drive. As
has often been said, it's not a matter of whether you will have such a
problem, but when.

Essentially you should back up what you can't afford to lose--what you can't
readily recreate. What that is depends on how you use your computer and what
you use it for.

It takes time and effort to backup, but it also takes time and effort to
recreate lost data. If you back up daily, you should never have to recreate
more than one day's worth of last data. If weekly, there's potentially a lot
more to recreate. You should assess how much pain and trouble you would have
if you lost x days of data, and then choose a backup frequency that doesn't
involve more pain and trouble than that you would have if you had to
recreate what was lost.

Some things (photographs, for instance) can never be recreated, and more
frequent backup may be wanted for them.

At one extreme is the professional user who would likely go out of business
if his data was lost. He probably needs to back up at least daily. At the
other extreme is the kid who doesn't use his computer except to play games.
He probably needs no backup at all, since worst case he can easily reinstall
his games.

Most of us fall somewhere between those extremes, but nobody can tell you
where you fall; you need to determine that for yourself.

Should you back up Windows? Should you back up your applications? Most
people will tell you no, since you can always reinstall these easily from
the original media. But I don't think the answer is so clear-cut. Many
people have substantial time and effort invested in customizing Windows and
configuring their apps to work the way they want to. Putting all of that
back the way it was can be a difficult, time-consuming effort. Whether you
should backup up Windows and apps depends, once again, on you.

How to backup? What software to use? There are many choices, including the
Windows-supplied backup program. Which choice is best for you depends at
least in part on the answers to some of the questions above.

Finally what backup media should you choose, and how should it be stored?
There are many choices, including CDs, tape, zip drives, and second hard
drives.

I don't recommend backup to a second non-removable hard drive because it
leaves you susceptible to simultaneous loss of the original and backup to
many of the most common dangers: severe power glitches, nearby lightning
strikes, virus attacks, even theft of the computer.

In my view, secure backup needs to be on removable media, and not kept in
the computer. For really secure backup (needed, for example, if the life of
your business depends on your data) you should have multiple generations of
backup, and at least one of those generations should be stored off-site.

My computer isn't used for business, but my personal backup scheme uses two
identical removable hard drives,I alternate between the two, and use Acronis
True Image to make a complete copy of the primary drive.