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What is the best way to back up my data before I update to the newest version. And is it important I update?

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Updating is always important. They contain security fixes and other bug fixes. Generally update within the 3.0x considered safe. Moving between 3.x could require some changes and updates to your theme or plugins.

I like to take the mantra, better safe than sorry. I would back up your database and anything your wp-content folder (plugins, uploads and themes). Armed with these two pieces you should be able to re-install if something bad happens.

There are plugins to help with the Backups and DB Backups. A couple I've heard mentioned are WP-DBManager and a hosted solution called Vault Press

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