Everytime you log into your account while an external disk is attached, you can get all your preferences and documents from there. Logging into your account with no external disk present, you will work with your home folder on your internal disk.
The benefit? MacOSXHints says:
What's the use? My PowerBook has to be repaired, so I backed up all my data to another drive. While I am waiting for my PowerBook to return, I can work on either my sister's or my girlfriend's Mac, depending on whose Mac is free. Instead of copying my complete home folder to two different computers, I just use the external disk and can switch computers whenever I need to.