Hi TT
The best piece of advice would be to upgrade to Windows 7. It is intrinsically more secure than Windows XP but that said, XP SP3 is a very good OS, in fact it's Windows 7 greatest competitor. In my opinion, the best improvement in this regards is to be able to log in as a restricted user and run anything as the administrator simply by supplying the password. In Windows XP, it's a little more complex.
I'll assume that you cannot or do not want to upgrade to Windows 7.
In general, you won't be able to install software or hardware drivers as a non admin and will not be able to run Windows update.
1. Installing software. Download it using your restricted account and save it somewhere common to everyone, for example Public Documents. Log on as the administrator account and install it. Log off and back onto your normal account (fast user switching might be helpful here).
2. Installing hardware. As above.
3. Running Windows update. You could do the same as 1 and 2 but it is possible, although quite technical, to run Windows update from your normal account as a "scheduled task", for example once a week - usually on a Wednesday so that you pick up the updates from Microsoft's "patch Tuesday". If you take the plunge, and would like details of how to do this step, let me know.
You will face problems with some software. Some developers are too lazy or not sufficiently skilled to write software that works correctly under non-admin accounts. Meaning, you might find some software that doesn't work. All of the major "usual" software like Office (Microsoft or Open Office) will work fine as will Firefox, Internet Explorer, Thunderbird, Windows Live Mail etc. My approach is that if the software doesn't work, I find an alternative. Occasionally, I email the developers and berate them but it's like peeing in my wetsuit. Gives me a warm feeling but nobody notices.
My advice is to give it a go, and stick with it. At first, it's a bit painful but like most things, it gets easier. A few minutes here and there but compared to the hours of pain some suffer (as evidenced in this very forum), it's well worth the trouble. I've done this for some people who, like trying to quit smoking, revert to the old ways because it's the easy route - until something goes wrong!
Finally, to answer your question about "how", I found this page which gives a good description, more eloquently than I could, and saves me from wearing out my fingers ;-)
How to simulate User Account Control in XP
Good luck. If you do hit any problems not covered here, do pop back and ask for help. I ran XP this way for, oh I guess about 5 or 6 years and it really pays back. A bit like Domestos, doing the 4 things above kills 99% of all known germs.