What OS?
Windows 7 has a decent encryption for selected folders, with a facility to backup the encryption key, to USB key or the like or even written down. Also encrypting USB keys and devices, since those can easily be lost or stolen. I highly recommend if you use it that you make several copies of the encryption key in safekeeping.
XP has encryption, and backing up the key to floppy and such too. In Win7 they made some significant improvements to the ease and ability to access/recover the encrypted contents, whereas in XP you pretty much needed that system to work.
Many USB keys and external hard drives come bundles with software for password protecting their contents. Not all are created equal, some have issues operating on different OSes, so you may find it works fine on XP but not Win7, or vice versa, or won't work on Apple if say you wanted to access it's contents from a MacBook, etc.
