Using PC's as firewalls (in linux or windows) is only of use if you have a large network (12+ pc's) so you can offload the processing needed for protection on all pc's to a dedicated firewall/gateway PC. Honestly, nowadays this is of no use. Heck, you can even buy one of the Linksys routers that run linux, or get the $300 killerNIC card that can run a firewall on it's builtin memory (both cheaper in the long run). All you'd be doing with a firewall PC is creating one more place to slow down your net access or cause problems.
Now, on the topic of your reformat approach, I certainly concur. I personally have always kept all my music, downloads, documents, tv shows, and game directories on an extra HD, so even if the windows installation completely fails most of the needed files are still available. Heck, I even have an old 30gb HD that has a no-fail installation of XP installed, that I leave disconnected unless I really screw up my primary installation and need to use my computer.
Also, it'd be worth looking up nlite. nLite is basically a program that let's integrate sp2/patches, remove unnecessary features, and preset tweaks into an XP installation copied to your HD, and then creates a bootable ISO file of the modified installation. I use nlite with RyanVM's update pack to create s 200mb XP install free of unneeded files/features and already tweaked to my preferences (imagine not having to download several XP tweakers like tweakui or freshui to get XP back to how you like it). There's even a thriving nlite community with plenty of user-submitted packs to integrate programs like cpuid, memtest, everest, or firefox.
Another program that I find of great use if you use any Mozilla product is mozbackup. It basically allows you to copy all your firefox/thunderbird settings/favorites/mail to a new installation.
Remember, always keep a set plan when reformatting. Put all your driver downloads and necessary program installs in a folder on your extra HD, so you can access everything once the new install is up and running.
PS -- Be sure you don't have a virus, since it can spread to the backup drive, and then back to the installation partition once reformatted. I'd just be sure to use a proven AV software like Antivir (best next to nod32 antivirus -- but is free).