What is the best process to backup and rebuild an iMac?

I have an old iMac running Snow Leopard.  It's starting to show signs of age in how it's been running, so I thought I'd start over with it. I've rebuilt Windows machines but never a Mac.  I have tons of stuff I don't want to lose.  I have Time Machine but I've never used it to retrieve anything I've backed up.  Will it work like that once I strip the machine and reload the OS-- retrieving individual files, etc? Or does it strictly backup the computer as a total image that you reload? Or should I just backup all my files the old fashioned way, on an external drive?  Any step-by-step guides out there?
OR
How simple is it to replace the existing HD to start over?  Is it cost effective?  I haven't done any research, yet.  Just seeing if anyone has wisdom to offer.
Thanks!
ramz

Any step-by-step guides out there?
You can find anything you need by doing a Google search!
==========
Mac Basics: Time Machine 
User Tip:  Most commonly used backup methods
Emergency backups you didn't know you had!

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