I've done something similar.
I have Win98 & all my applications on the C: partition, my data on D: & an E: partition that is just large enough to hold a CD-ROM. I also have Linux installed on its own set of partitions, but still use the Windows D: drive for my data storage.
Most software seems to scatter large numbers of files in amongst Windows & storing information in the registry, requiring a re-install after a clean install of Windows. Didn't seem to be any benefit from separating applications from the Windows.
I've set Windows & all applications to use the D: partition for the certain system folders & files eg desktop, favourites, off-line web pages, email etc. I also use the D: partition to store compressed installation files for downloaded software should I need to wipe the C: partition.
The CD size partition makes it easier to store a disk image prior to installation burning a CD.
For back up I have a spare laptop drive in a caddy that plugs into my laptop's PCMCIA port. All I need to do stick the PC-Card in the slot, wait for the HD to be recognised & then copy the D: drive in it's entirety.