Did you know that by going into System Preferences and creating another user for your wife, she gets a separate iTunes library with none of your music in it? This is what I did for my dad, who has an iPod but no Mac (as of yet).
Then, go into your existing iTunes library, burn all of the HerFavorites songs onto a data cd, log out, log in as your wife, copy the songs into her iTunes, log out again, log back in as yourself, and delete the HerFavorites songs.
Viola! No shared music!
Keep in mind, if you only have one iPod for both of you, you'll have to do cumbersome manual iPod management. Oh, and this sort of makes your playlists pointless...

Also, how do you make a song have multiple genres? When browsing, does the genre appear on its own, as "Rock ,HisFavorites" or does the song get listed seperately in Rock and in HisFavorites?

Yes I considered making my wife a user, but we don't use it as a multi-person machine otherwise, so it wasn't worth it (now she's getting her own iMac and it really doesn't matter!). :-)

As for the multiple genres, I just add ",His Favorites", so the genre would read "Rock,HisFavorites" and appears in both the genres -- does that answer your question?

yeah, it does. thanks. my next question - when will Apple allow for true multiple genre ID3 tagging???

I still don't understand why you would both use the same user account. The whole design of the Mac OS and even Windows is to keep people separate. It's a security and organisational thing.

I have all my music (about 20Gb) worth on an external drive because my internal drive is only 13Gb. You can specify an alternate location to one's user folder in iTunes preferences. You probably could have put your music somewhere like the root level of the computer or an external drive like I did and both accessed it, as it wouldn't be in your user folder.