I am using mirrored drives, two hard drives that are kept identical by a RAID controller on the motherboard. If you have a hardware failure of one drive you have a complete copy. Only expense is the extra harddrive, assuming you have a motherboard with a built in controller. Nice because it is fire and forget, don't have to flip CDs/DVDs, run backup jobs, etc.
For versioning I wam going to use Volume Shadow Copy which is built in to the Vista OS. You could also try out Beyond Compare. A GREAT utility program. You can use that to make snapshots of a folder. I also use it to sync ROMs, CHDs and other support files between my normal workstation and my arcade cabinet. The latter is a nice feature since it only copies the files that have changed.