When it comes to data security, you really don't want to mess around. On the other hand, if you want to hide some files for another reason -- say, as part of a challenge or game -- then a neat way to do it is to compress those files and use a program like Steganography to make that archive appear as an image to unsuspecting users.
Waqas Ahmed over at Addictive Tips made the observation that many archiving tools are intelligent enough to locate the headers for ZIP and RAR files within another file and allow you to open it without having to manipulate the source.
Steganography is an open source utility that can "hide" a file -- not just archives -- within an image of your choosing. Normally, you'd have to use the program again to recover the file (or engage in a bit of hex editing), but by wrapping it up in a ZIP or RAR archive, we can access the data without the tool.
the program itself is easy to use, as you can see in the lead image. Just pick a picture and a file, choose a name and click Create. Reversing the process is done via the "Open" tab.
In terms of keeping your data private and secure, it's not particularly bullet-proof and there are much better methods, but as an exercise in alternative ways to keep prying eyes out of your archives, it's definitely an interesting procedure.
Something to keep in mind is that a large archive paired with a small image won't fool the more observant, so make sure the ZIP/RAR is small or the image you use is itself quite large.