BackUps, in my own personal view, have 2 different categories.
Personal DATA and System BackUps (or images).
A back up of DATA are things such as..
The My Documents Folder, Pictures, Music, and Videos. Or anyother folder you may have made containing important documents.
Such as reciepts or bank statements.
Basically all personal DATA that can not be or re-installed from disc or download, and would be lost forever if something happened to the HardDrive or PC.
Or in other words, things that are yours and Windows or your applications have no need for to operate.
System backUps, or System Images on the other hand, is a compete image of the Operating System (Windows 7 itself) and all programs you have installed.
Its basically a complete copy of the Hard Drive, not just specific files or folders.
In the event something happens, such as a Virus or the HardDrive fails, Windows can be easily restored to another HD, or the same HD, with everything intact just as it was the day the image was made.
This image would include everything on the Drive.
Windows itself, all of your programs (software), system settings, as well as the activation status of any software, Windows included.
If you have multiple hard drives, it is a good idea to keep the two separated from each other.
This way, all of your personal DATA is away from the OS, and easier to backup and keep organized.
Since Windows does not even need any of these things (it is only your own personal files), it also makes sense in regards to keeping the Windows installation smaller and faster to back up and restore in the event of a problem.
If you have just a single drive, a syetm image will backup everything including your personal files. This may be time consuming though, depending how much is there.
As richnrockville said, and I agree, if its something you know for a fact you do want to loose or can not replace, make sure you have a backup of it.