Best practices for a backup and fresh install
(Option #1)


Get Carbon Copy Cloner or SuperDuper! (yes, with an ‘!’).
Get an external Firewire or USB2 Drive that has the same or bigger size than your current drive.
Using either of the above programs, make a perfect clone of your entire Old hard drive. 
Boot using the image in the New drive to make sure it works (either program will explain how to do that, it’s just pressing a key at startup).
Once you’re sure your new drive boots and all your information is there, shutdown the computer, disconnect the new drive and store it in a safe location.
Proceed to format and reinstall your computer with your OS X DVD.
At the end of the install, decide whether you want to transfer all your information automatically using migration assistant (usually a good idea, but if there’s something “bad” with your profile, it will likely be copied over again, however this time the operating system will be fresh and you can always create a new user and manually replicate things). If you go this route, you’ll need to connect your New drive so Migration Assistant can pull the data (it won’t alter the New drive, it will read it only).
(Optionally) Do not transfer any settings with Migration assistant and do it Manually after the install is over. This is good if you have problems in your profile, but it’s a tedious work if you had years of “stuff”. You can have Migration Assistant to only transfer your documents (to save you the trouble later), but if you transfer your “Network Settings” and your “Applications” any problem you had in the past may “come back” in those two. You can always manually drag the apps from new drive to Old drive after the install. And unless you also drag their ~Library/Application Settings stuff, they will be “brand new and unconfigured”. I believe you get the idea.


(Option #2)


Do the same thing as Option #1, except that instead of making a clone (and booting from it), perform a full Time Machine backup to that new external drive. 
Once you have the backup continue with step number 6 up there. Remember that Migration Assistant will have to be told to “migrate from a Time Machine backup” instead of “just another volume”.


Which one is better? 
There’s no better or worse, but a few things must be observed:


A full clone, although may seem tedious, it’s a fully working volume that’s identical (well, almost) than your original one, it boots, you can even work from there in case of hard drive failure, in no time you have your computer back. That’s priceless in some environments and under certain circumstances. The clones can later (daily, hourly, etc.) be updated and it takes a fraction of a second to update (just like Time Machine doesn’t make a full backup every time). SuperDuper is very good at that and was a pioneer at doing it right and fast™. 
A Time Machine, although a very nice and handy thing (and I do recommend you also have one once you have your working machine reinstalled and migrated), is not bootable and in case of total hard drive failure, you wouldn’t be able to start working immediately, because Time Machine backups are not bootable and the recovery process is somewhat slower and more prone to errors (in my humble experience).
With that being said, Time Machine wins hands down when you “need to find that file I had on my desktop a couple of weeks ago”. Since Full Clones (and their incremental stuff) usually do not keep history of changes (CCC has some stuff about that, but the space used grows really fast), then you always have the “latest” copy of your drive, but you cannot go back to your drive the way it was “a month ago”.


So there you have the two main methods. 

An ideally backup plan (without going paranoid), will consists of a weekly (or daily) clone/snapshot to a bootable drive that you can store a few feet away from your computer every now and then and an “all the time” Time Machine drive sitting there, keeping your computer’s changes up to date in a short interval. This covers the two main problems:


I need last week’s file and I need it now! (Time Machine)
My Drive crashed but I need to continue working now! (Clone)


Good Luck! :)