Although Vista allows you to encrypt files and folders using the Windows file security system. However if you wish to protect your files, you will need to have a Business or Ultimate edition of Vista. You will not be prompted for a password each time you access the file, only when you log on to your user account. This user account has the decryption key associated with it, allowing you access to the data.
To begin, right click the folder you wish to encrypt and select Properties:
Then, click the Advanced button:
Now tick Encrypt Contents to Secure Data and then click OK:
If you encrypted a folder you will be asked if you wish to also secure the files/sub-folders within this. To do this, ensure Apply Changes to this folder, subfolders and files is selected and click OK:
You have now successfully encrypted your files. If this is the first time you have done this you may be prompted to backup the security key used to decrypt the files. If you do not back this up you will not be able to access your files if the key is lost or damaged on your PC.