Cables are easy to cut with a hand held, pocket sized tool. U-locks are a much bigger pain in the ass to open once they've been locked.

My favorite combination is a mini (Will actually fit in your back pocket) U-Lock and a four foot cable, used together.

The cable goes through each wheel and up to the U-Lock, which locks the two loops of the cable AND THE FRAME to a bike stand.

Never use the U-Lock as a "padlock" - always use it both to lock the frame to a bike stand and to also lock the cable which is securing your wheels.

When you use BOTH the U-Lock and the cable you have a system that is super versatile and portable. That means you're more likely to bring it along. Habit is paramount.

Never leave a bike outside, locked up, over night. Curtains.

A lot depends on the type of bike you have. I often lock my very beat up high school road bike in Greenwood with a cable and a Master-lock, but that's because

a) No one will steal that bike
b) If they do, I don't mind

Assuming your bike is worth more than a decent lock, I'd definitely fork out the dough for a good lock. The odds are, if your bike is at all worth stealing (more than $50?), the cable will be cut, especially at the UW.

For my "good" bike (not really that expensive), I have a Kryptonite Evolution Series 4 U lock; it goes for $45 on Amazon. I bought it in NYC, and used it there for 2 years there. The bike store I bought it from told me they'd never seen one broken. The only problem is that it is quite heavy, and kind of big. (Smaller U locks are, of course, lighter, but also safer because they lock around the bike tighter, giving less room for using the frame as a lever to snap the lock; but they are also harder to use). I mount it on the frame.

You could go for the Kryptonite Series 2 (more like $25), especially if your bike is not worth a lot - the odds are it won't get broken. Just don't get the really low level ones with circular keys (if they still make them) - those can be easily picked.

Anyway, buy a good U lock and you will have it forever - a good investment.

Your lock should be either:
1.) as good as a more expensive bike nearby or
2.) better than an equally expensive bike nearby.

It's good to have all the "quick release" parts (front and rear wheels, seat post) changed out so you need an allen wrench to remove them. I usually take a u-lock (the newer kind, not the circular key kind that can get opened with a pen) and lock the rear wheel to the frame and a pole. But sometimes I get lazy and just lock the bike to itself.

If someone really really wants your bicycle, they'll find a way to steal it. The key is having a less desirable bike or more cumbersome to steal bike than a nearby bike. It's also good to view commuter bikes as temporary possessions. I've had the same bike for the last four years, but I've had three bikes stolen (not in Seattle) before that, and I accept that one day my bike may be jacked.

This post has some great tips for dealing with bike theft:

http://bikesnobnyc.blogspot.com/2008/04/victim-complex-coping-with-bike-theft.html

I recommend using a large U-lock to secure your bike by its frame, and if you have quick-release skewers on your wheels, replace them with locking skewers. Using a cable lock to secure your wheels, even if it's in addition to a U-lock, can still result in stolen wheels, since it's easy to cut through a cable lock. With locking skewers, however, only a specially keyed tool will remove the wheels. One downside to locking skewers is that any time you want to remove a wheel (for transport or maintenance), you'll need the key. If you lose it, you'll have to get a replacement from the manufacturer, and you must know the serial number from your key so that they send you the correct one out of thousands of possible keys. This has never been a problem for me, and my wheels have not been stolen again since switching to locking skewers. You can also get these same anti-theft devices for quick-release seats.

I'm sorry to hear that you are terrified! That's a bad way to feel. I hope that whatever you decide leaves you feeling empowered and comfortable riding your bike everywhere you want to go, and leaving it there for as long as you need to.
Bikes do get stolen. I hear they get stolen on the UW campus pretty often. If you want to be able to ride with confidence you are going to need to get over your fear of theft, right?

Regarding the lock itself; I think that you should get the highest quality lock that you can afford and that you can realistically carry with you every time you ride. I'd get a shackle or u-lock rather than a cable lock because those are harder to cut, and a smaller one because they are harder to pry open and easier to carry. If you can afford to, maybe get a second lock for your wheels, or use your existing cable lock for that! Multiple locks add time to the theft and may discourage stealers from choosing your ride over the next victim's.

Also, be smart about where you lock your bike. A secreted spot behind the dumpster in the parking lot is not as safe as the pole right in front at a busy bar or restaurant. If you park your bike where there are likely to be witnesses, thieves may be scared off.

Finally, lock to something which is itself secure and difficult to cut through.

Finally, don't be ruled by fear! Ride where you want to and take the precautions that you see as reasonable for the risks that you take.

What's the most valuable part of the bike?

If it's the frame, the rear rim and tire, I'd recommend the smallest u-lock made for a certain key that would fit only around the rear rim in the rear triangle of the frame, and something that can't be easily moved or manipulated, something recent, maybe On Gaurd or Kryptonite. Although bolt cutters are good at cutting spokes then rims, including the steel ones. Then maybe the frame would be nicer to get around. Many jacks won't fit into the small ones, although angle grinders can get them. Sheldon has an article on this I like.

You need a bit of luck to get a decent frame on a working bike all for $40.

Not really expecting folks to, but, anyways, lock it up whenever unattended. no exceptions. If it's in/on a car, lock it to the car, or something big and heavy. If it's in the office, a backyard, a porch, or a building with not so secure entries, make sure an untrusted one can't take it. Get the serial number, a picture, and the rightful owner's info in the seat tube or something, like very soon. If it gets stolen, make a police report, maybe something on stolenbicycleregistry.something, bikewise, get the word out there soon.

so, ya, that's one side of the spectrum.