How can I password protect / encrypt a Mac OS X folder?

I just finished working on my taxes - always a highlight of the year. Not. - and face the same dilemma: I want to have the files on my laptop in case I need to reference them, but at the same time, I also don't want them easily readable in case someone rips off my computer or otherwise finds it and starts poking around.

In fact, now that I think about it, there's a fair amount of information on my laptop that I wouldn't want posted to the Internet or perused by the public at large. Hmmm....

Turns out that while there's no way I'm aware of to add a password to the Archive ZIP file (which would really be cool, Apple. Hint, hint), there is an interesting way you can use Disk Utility to create a disk image that's encrypted and cannot be mounted - to gain access to the files and folders without knowing the password. Sound good?

Here's how I did it...

Go into your Applications folder, then within the Apple folder, and you'll find an app called Disk Utility. Launch it and here's what you'll see:

Ya see along the top the icon for "New Image"? Click it. Now you'll be able to configure exactly what you want for your new disk image:

First things first, though. Find the folder that contains everything you want to protect and choose File --> Info. You'll see that among the many fields shown is the size of the folder and its enclosed information. Like this:

Here you can see that the data files I have require only 467KB, so I'll try to create a 500KB disk image. To do that, I click on the Size menu, showing me tons of options:

Choose "Custom..." and you can type in the value desired. I'll choose 500KB:

Click "OK" and uh ohhhh:

Not sure why 10.5MB is the minimum size, but that's okay. We'll run with that. Next up is to click on the Encryption menu:

128bit AES Encryption is probably just fine for your needs, so choose that. Add a name and here's what you'll have, something kinda sorta like this:

Ready? Click "Create" and it'll prompt you for the encryption password key:

I used "iHEARTtaxes" for mine (just kidding!). Enter your password, twice, then click on "OK". You might want to opt not to save the password in your Keychain, btw, so that there's no trail of the password anywhere on the computer. I opted out.

Now there's a new entry on the left side of Disk Utility:

You can quit the Disk Utility now because we're done with it.

Now on your desktop is the new disk image as a ".dmg" file and as a mounted disk. Open it and drag your files and folders thereon:

Nice. One more step: unmount the disk now that you've added that data by clicking on the eject button:

You can test it by double-clicking on the ".dmg" file and you'll see:

Yay! Ya got a password protected virtual disk where you can store anything you want. As soon as you unmount it, it sits safely on your disk. Now, once you're convinced it works, delete your secure files (after copying them over onto the encrypted virtual disk!!) and then empty the trash. Done!