This is a common discussion at work... No security system is completly error-proof, or has holes in it. It's a matter of where you want to be able to have trust. If you trust your computer and your file system, then it's reasonable to have an encrypted file to store passwords, especially with a relativly strong encryption method such as blowfish. If you *don't* trust your hardware, then methods that you have suggested work better, though storing passwords with a strong password still provides some stability. (Even then, you do change your passwords every other week right? ...)