It's great that you actually worry about wallet security before the worst happens. Kudos to you!
Here are my recommendations:
(0) Prerequisites: keep your machine up-to-date and malware-free!An infected machine cannot be trusted. It can record your passphrases and send them along with the wallet file.
Never use a pirated version of an operating system! You can't be certain someone didn't add a little something extra to it.
Keeping your machine in good health is mandatory.
(1) Client upgrade technicalities.The latest bitcoin client can be downloaded here:
http://sourceforge.net/projects/bitcoin/files/Bitcoin/bitcoin-0.5.1/If you are currently using the old bitcoin client, chances are that the actual filename is bitcoin.exe
The new client is named bitcoin-qt.exe
Therefore, any shortcuts you might have created will have to be updated with the new name.
Installing the new client over an existing older one will not delete the old bitcoin.exe. You can remove it manually or just leave it.
Make sure you're not using the old bitcoin.exe by mistake.
(2) Wallet theft.
The new client has the option to encrypt your wallet (using the well-established AES algorithm) with passphrase of your choice. Come up with a decent passphrase, at least 16 characters long. You can use a sentence, like "The-Bad-Guys-Will-Never-Get-My-Bitcoins-Now". Don't use the example passphrase, of course
Make sure to write your passphrase down and put in in a secure place like a safe or a bank deposit box. Should you forget it, you'll want to have it somewhere.
(3) Wallet loss.For maximum security, I suggest you create a TrueCrypt archive containing the ENCRYPTED copy of the wallet file. Don't re-use the passphrase. Keep the passphrase secure.
Once this is done, you can stop worrying about data theft and start worrying about data loss:
+ keep an encrypted copy (a TrueCrypt archive containing the (already ancrypted with the bitcoin client) wallet inside it) of the wallet on your flash drive,
+ copy it to your mobile phone,
+ upload that encrypted copy to the internet (eg. mail it to yourself),
+ if you own a file server, a NAS, or a VPC upload a copy there as well,
+ burn it on a couple of CDs and send them to your parents, a sibling of yours, your parents-in-law...
This way, you are protected from data theft (someone obtaining the encrypted archive would have to break TWO passphrases instead of only one) and you are protected from losing the
wallet due to a hard drive failure of your house burning down.
Stay safe, stay secure, stay a happy member of the wonderful Bitcoin universe.
