Firstly, it's a totally personal thing. Just get something that works for you.
However here's how I do it.
My folders are arranged by year and then by 'event' depending on what I was doing that year. So in 2008 I've got folders for shots I took for the Beltane society, shots I took for hype magazine, shots I took on the trans-siberian. These are then sub-divided, so each edition of hype magazine gets its own folder etc. It's easy to pick your winners out of these folders just by filtering based on stars.
My collections are for things that I do more than once. I went to China in 2005, 2006, 2008 & 2009. Shots from all of these years are in my 'China' collection. I shot for Beltane in '07 and '08 - shots from both of these are in my 'Beltane' collection. You can then have sub-collections - I've got a 'Beijing' sub-collection containing shots from BJ in '05,'06,'08,'09 etc.
Just how I do it - maybe of use to you.