It's also a protection mechanism. If anything were to happen to the M1 Mac Mini, my data (the important thing) is on the external. So I just replace the computer.
It's not a protection mechanism to have the data on the external
instead of on the Mini. Either way, you have no backup! You'd only be protected if you had a complete copy of your data
on both.
Plus your external is just as likely (probably even more likely) to fail than the Mac Mini. I've had a couple of externals fail. I've had Macs that needed repair, but never had one that failed completely (such that I couldn't get the data out).
At the very least, you really need a complete duplicate of your primary, on an entirely separate drive, as backup. If you had that, you wouldn't have to worry about your primary drive (whether it's on the Mini or an external) failing, since you'd have that duplicate.
But what you
really need is a complete backup system. That would typically mean having:
(1) The data on the primary drive
(2) A separate drive, attached to the Mini, that contains a complete backup copy of the primary drive, and that automatically updates nightly (I'd recommend Carbon Copy Cloner).
(3) A
remote backup copy of the primary drive (local backups don't protect you from fire or theft). The remote backup could be in the cloud. But I personally don't like using the cloud because, while it's quick to update with new files, it could take forever if you ever need to retrieve the entire contents of your drive (which, in my case, is >1 TB); plus can you reliably transfer 1 TB without interruption over an internet connection? Thus I instead have a couple of cheap portable HDD's for that, where one is always kept in a safe deposit box. When I want to update the remote backup, I swap them out.
(4) Optional: A Time Machine drive that continuously backs up your primary. This is not a true backup—Time Machine is too complex to be robust enough for that (I've had Time Machine volumes get corrupted several times, forcing me to wipe them; I've never had that with my Carbon Copy Cloner volumes)—but does offer a great interface for versioning (finding older versions of current files, or older versions of files you've accidentally deleted).