yup that would work fine.
basically what you do is go to your c drive and copy any and all files that you want to save. you cant backup programs, only files. so say you had a special version of an anti virus, you would not be able to save the program but you could save the install file to load the program... does that make sense?
So with like itunes, you would go to where you have all your mousic saved, and copy it to the external hd. so if you wiped your c drive you can just go back to the external and copy the folder they are saved in a transfer them back to your c drive and then point itunes to the files.
It isnt a good idea to play the music from the backup hard drive though. make sure you play it from the c drive becasue you run less of a chance of loosing the backedup data that way