The system is finally up and running the way I want it to, more or less. Thanks again for the posts with advice and links
I read the links from the post above and also, completely by accident, came across this recent thread
where Morbius1 explains the use of bind (rather than bindfs) and offers a short tutorial.
So I created new directories in /mnt/data/ as follows:
sudo mkdir /mnt/data/Documents /mnt/data/Pictures /mnt/data/Music /mnt/data/Videos
then rinse and repeat for Pictures, Music and Videos
sudo mount --bind /mnt/data/Documents /home/myusername/Documents
Important caveat - move out stuff from /home/myusername/Documents, Music etc BEFORE performing --bind because the files will disappear afterwards. I had already made copies of my files from /home to /mnt/data earlier and then just moved the files to their respective subdirectories (docs, pictures, etc); the original files in /home/myusername/Documents were nowhere to be found after --bind.
It has been working so far. I also want to experiment with linking but haven't gotten around to this yet.
Finally, I installed Ubuntu 10.04 LTS in the 20GB partition and it is working as well. I can access and save data to the /mnt/data partition from there so am pleased as punch.
Next step: format some of the unallocated space at the end of the hard drive and install something adventurous but not drastic (I do not feel up to installing arch linux just yet). Suggestions for other distributions to try out are welcome