Hi there !
The folder you want is -->
Users/yourusername/
This will then back up everything that is in your home folder, all your documents, preferences etc. It won't though back up all your Applications, but presumably you have the original disks for these.
This would back up all your 'data' and preferences, but not Applications...Software Updates etc.
Depending on your needs there are various ways to back up, I use different backup plans for different machines.
This laptop that I'm working on is used for a lot of Development work and so I use Retrospect to do Incremental Backups (back up everything completely...then it only backs up changed data after that), and I also use to do a complete bootable backup.
If you imagine that you back up your home folder, and then you install some new software and it makes your Mac unstable and keeps crashing, you would have a number of choices...
You could do an Archive and Install, from the original OS X DVD. This is one of the easiest ways because it would replace the old System files with new, and then preserve all the Apps that you had loaded and would also preserve all your user Data. You would however have to re download all the System Updates and apply them before being able to do anything else.
From experience the above method can take the best part of an afternoon, depending on how many updates there are etc.
If you use something like CCC, the scenario is different, I make sure that CCC is scheduled to 'Clone' my drive ever day (at 3.00am). It does this to two different 'targets'. eg on Monday CCC creates a 'clone' disk image of my drive to Firewire Disk A then on Tuesday to Firewire Disk B . This gives me the option of taking my drive back to the state it was in "Yesterday' or 'the day before'.
So now if I decide to install the latest must have piece of software and my Mac decides that it doesn't like it, then all I have to do is plug in Firewire Drive A or B (depending where I want to take my Mac back to...) and then reboot from the drive...then erase my internal drive and tell CCC that the External drive is the 'source' and that the Intenal Drive is the 'Target'...then it will copy everything back to how it was. From start to finish, depending on your drive size, my laptop 100GB drive can be wiped and replaced in around an hour.
regards
Ric