[dnanian]

Hi, Thomas. Welcome!

It's pretty difficult to maintain a bootable volume that's shared with files that aren't part of the backup: in general, this is *not* something I recommend that you do.

Instead, I'd suggest that you partition the external drive into a backup volume and a data volume, and then target files as appropriate to their proper locations.

Partitioning using Disk Utility will erase the drive. If you don't have a location to move the files to before you partition, iPartition from Coriolis Systems can do it "live" with your files in place. (It sounds, from your description, that you have erased the drive before, though.)

Once that's done, you'll target the backup to the backup volume, and you can use Smart Update to keep it up to date and bootable.