Is creating a system backup worthwhile and if so what's the best way

Images are snapshots of your current PC (typically the OS partition) which allow you to restore the image to your existing or a new HDD if your old one fails and be operating just like you were when the image was made. This includes the OS, installed programs - the works. It's the best get out of jail card there is.
You don't need do an image restore to extract files from the image without harming it. For Macrium just double click the image and it mounts as a virtual drive. Copy out the files then dismount (in computer disc display mode right click and dismount the virtual drive). For Windows images you can do the same but with a little more fiddle -
System Image - Extract Files Using Disk Management

In case this is a little vague. When you mount an image you will be present with a new drive under Windows explorer which you can navigate just like it was a real copy of your imaged drive.

I always long for the "sexy" stuff and still live in hope.
We are talking about the basic technical stuff that may come with names that appear over technical - the functions are not.
1) Get your ext HDD
2) Run Macrium Relect free and choose on the left
"Create an image of the partition required to backup and restore windows"
3) Select the destination as your external HDD using the browse option.
4) Select ok ok ok until it says the image is being created. It may take 30 min or more depending on how much data is on your main operating system partition.
5) It will then come back and the image was created and give you a time it took.
6)exit macrium
7) Look on your ext HDD and you should see a file *.mring
8) Double click on that is the "sexy" mounting stuff and you will see a new drive in windows explorer eg H:
9) Go start orb - Computer and explore H: and it will look like your original drive. Explore as much as you will.
10) Again with start orb - Computer you get the little bars. Right click on H: and select the dismount option and H: will disappear.

To restore the system image refer to the tutorials given.
This is a learning exercise and let me say Microsoft will not provide this level of advice. We are not paid and don't work for Microsoft. This is a Forum of enthusiasts. I wish Eva Green would join.

How do I know what is what and what goes where.

All the data with folder structure and whatever is copied in a single-file biggish package that contains ancillary info needed to put it again in the right place. It's not that different than creating a ISO file from a CD/DVD with your favorite disk burning tool. You end up with a biggish file (a disk image file) you can keep along with other files or move on a USB thumbdrive.
Everything is handled by the program, you don't need to do anything manually.

"mounting and dismounting" is just opening this special file to access/modify its contents or closing it again. Nothing more.

Would it not be simpler not to compress it – HDD are cheap. Why compress it.

They don't use lossy compression algorithms. Data quality is intact.

Now, for the sake of giving all options, I'll tell my choice.
I personally clone my primary hard drive regularly to another hard drive.
Ok, you use up a hard drive (as the second drive is ALL used up by the clone, erasing any of its content), but in case the first drive fails, you just disconnect it and replace it with the second one, then go in the BIOS options to make sure the PC is booting from the new drive and that's it, back to work in a minute flat

I keep the second drive in a hard drive docking station so it's not always connected and I don't have to open the case every time I do a backup, but if needed I can pop out of it the drive to replace a malfunctioning drive without the hassle of disassembling a more common external HDD enclosure.

You need another hard drive with a similar capacity and a tool like AOMEI partition assistant. I have a Pro version, but the Free one can do it as well.

Then it's just a matter of activating the "clone disk wizard" of the utility. AOMEI does that by selecting Wizard --> disk copy wizard, and then following the steps (telling what drive you want to copy and what drive is the second one) all else is automated or recommended.

It will ask to reboot to perform the operation, and you will have the option to tell that after it has finished you want it to shut down the PC, which is useful if you do this before going to sleep.

Admittedly, this is a viable solution if your main system drive is smallish, like say less than 500 GB. And you have some HDDs with a similar size to spare.