You have to think about 1) how worried you are about losing pics, and 2) how convenient you want your system to be. So what works for one may not work for others. That said, here's what I do:
1) When I upload pics from my camera, the pics get stored on my computer in the "pictures" folder. Each upload is saved as a dated subfolder so I can easily find the pics by date.
2) Then I upload my photos to Costco.com photo center, where they store all my photos, too. I chose them because the photos are $.13 and they ship free. I have hard copies shipped to me for my photo albums and scrapbooking.
3) When I get hard copies, one complete set goes into a photo album for "archiving."
4) I also copy the new uploaded folder onto a DVD (they hold more than CDs), for easy loaning or transporting when I need it--also as a back-up.
This whole process takes 10-15 minutes, about 1x/month (about 75 pics each time).
Now, I also have an external hard drive that backs up my entire hard drive, because I have a home-based business and have had to pay a lot of money to recover files after my computer died. So I feel my photos are little "overprotected." But this works for us since we like to look at photo albums, I like to scrap, and it seems like the photos are always where I need them to be electronically. (For example, it's nice having all my photos at Costco.com because when it comes time to make those presents like calendars and mouse pads, etc.)
To REALLY confuse you, I'll say that I also have *some* photos on Flickr.com, for those relatives and friends we don't see often. We don't have a website or blog, so this takes the place of that.
Happy archiving!