The problem is that to Time Machine, a home directory protected with Filevault is just one big "sparse image" encrypted file. Although it will happily backup this file, doing that defeats one of the purposes of TM, which is to give you snapshots of every individual file from different times, so that you can go back through them and preview them easily before restoring.
If TM is backing up this giant disk image each time, then it is spending all your disk space on your backup drive on the whole disk image for every snapshot. This is a total waste of space. Without Filevault, the behavior would be to take a snapshot only of the changed files, so that your backup drive was only using space to store 1 copy of your files, plus the changes for each snapshot. Another problem with the interaction between FV and TM out of the box is that it's not very convenient in the "Cover Flow" interface to browse through the encrypted images, nor to have to provide a passphrase for each and mount each in order to look at the files inside.
Therefore, I decided to use "rsync" (from Terminal) to backup my home directory to an external drive while I am logged in. In order to keep my files secure on the backup drive, I decided to encrypt that whole device with Truecrypt, which just recently added support for MacOSX.
First I downloaded the Truecrypt .dmg file, mounted that by doubleclicking it, then ran the Truecrypt installer inside there. Once Truecrypt was installed on the Mac, I ran it and told it to encrypt the whole external USB backup drive.
After that was finished, I mounted the new volume according to the "Beginner Tutorial" in the TC documentation. At this time, TC could only create the volume as a FAT filesystem. Because I've been burned before by FAT's maximum filesize of 4G (tarring some stuff directly to the backup drive and having my tarball silently truncated at 4g), I wanted a real filesystem for my backups.
To change the filesystem of the mounted Truecrypt volume, I opened Disk Utilities from the Applications, Utilities menu in the Finder and, while Truecrypt volume is still mounted (so you see it without the encryption), told it to partition the new volume 200G HFS+ and 50G FAT. I left a FAT partition on it so that I could still use the drive on other non-Mac computers.
After the TC volume was re-partitioned and reformated, I was ready to run rsync to copy my home directory in there:
rsync --archive --progress --verbose \Where my username on the Mac is "me" and the HFS partition inside the Truecrypt volume is "MacBackup" and the directory inside there where I want all my backup stuff is "backup." The result of the command is that everything in my home directory, including hidden files that begin with a '.' like .bashrc, will be copied to the backup directory -- except for a few subdirs of the home that I don't care about and have excluded.
--exclude '.Spotlight-V100' --exclude '.fseventsd' \
--exclude 'Desktop ' --exclude 'Library/*' \
--exclude 'Downloads/*' --exclude 'Music/*'
--exclude 'Public/*' --exclude 'Sites/*'
While figuring out which rsync command will work for you, add the "--dry-run " option in until you get it right. I will be saving that command in a shell script that I will periodically execute after connecting the USB drive and running Truecrypt to unlock and mount it.
The reason that I am involving Truecrypt at all is just so that I could use the backup drive on other non-Mac machines, since it is cross platform Windows/Linux/Mac encryption. If I didn't care about the cross platform stuff, I would just have used Apple's Disk Utilities to create an encrypted disk image on the USB drive, and stored backups in there. I sort of defeated some of that purpose by using an Apple-only HFS partition, but maybe in the future there will be a better cross platform filesystem to select from the Disk Utility menu that will also support files larger than 4G.