What is an encrypted disk image?

It is simply an encrypted file that when double clicked on will prompt for a password. Once authenticated the disk image will mount on your Mac like if you had inserted a CD or USB flash drive. Once you have copied data to the mounted disk image you can unmount the image causing it to require a password to mount and view its contents again. This is a great way to secure files you don't want others to see.

How to create an encrypted disk image.

Launch the Disk utility app under /Applications/Utilities/Disk utility.

Click on the file menu and select New blank image.

In this example I have a 2GB USB flash drive that I want to use. I will create a disk image with the following perimeters.

Size: Custom 1.8GB
Make sure you pick a size that will not be larger than the disk you will be storing the encrypted image on. In my case I made mine 1.8GB to fit on the 2GB USB flash drive.

Format: Mac OS Extended (Journaled)
Use the default.

Encryption: 256-bit encrypted
Use the highest level of encryption.

Partitions: Single
Use the default.

Image Format: sparse disk image
This will create an image file that will grow to the maximum size as data is added to the disk image. It will not use all 1.8GB of disk space from the start.

Give your image a name and click create. You will be prompted to create a password. Note: Make sure you uncheck Remember password in my keychain. If you don't it defeats the purpose since anybody could walk up to your Mac and mount the image when you are logged in.

After the image is made it will automatically mount for the first time. You can now copy data to the image. When you are finished make sure you unmount the image by dragging its icon to the trash or selecting the eject button next to its icon in the quick access column of any finder window.

To mount the image again simply double click on the disk image you created. In the screenshot below my disk image is named personal.sparseimage at the top of the list.

It will prompt you for your password.

Note: Remember to unmount your disk image whenever you are finished with it. Make sure you backup your encrypted disk image!