What is the right way to backup my whole phone? I did a factory reset last night, and I'd like to try to mod my G1 but I want to make sure I have a good, complete recovery image. Preferably one that will restore things like my K9 mail settings, in addition to my installed applications. If I went ahead right now with the modding I wouldn't need these things but I need to just use my phone for a few days, for which I'd like to arrange my settings. 

I think I need to use nandroid, so maybe my real question is: are there caveats to be alert to in a nandroid backup?
If you only want apps/settings backed up, I recommend Titanium Backup.  It requires root.  Its backup will be saved to /mnt/sdcard/TitaniumBackup/, you can copy that folder to your computer just in case your card gets formatted.

If you use ClockworkMod / nandroid, do the same thing (copy the /mnt/sdcard/clockworkmod/backup folder to your PC afterwards).  The only real caveat is that you should flash the ROM you had when the backup was done before restoring the backup.  If the ROM you flashed afterward was significantly different, restoring without first reflashing the previous ROM can brick the phone.