Options for Replacing a Failed Hard Drive

I kept getting a blue screen whenever I tried to start my computer saying "Unmountable Boot Volume."  I searched this forum and found out enough to run a diagnostic on the hard drive which came back Failed 7.  I also found out enough to know this this is bad and that I need a new hard drive.

 

However, I would like to find out more about what I actually need and what I can get away with.  For example, I already have an external hard drive.  Can I just use that as my only hard drive?  Are there disadvantages to doing that?  Also, I would like to know what I can do to save the information on my failed hard drive.  It's not too much, just replacable software plus music and pictures that I would appreciate not having to replace. 

 

Some forums mention something about performing a recovery.  However, I have not found a forum that explains how to actually perform one.  Should I perform a recovery (if possible) or should I try and transfer what I can after installing a new hard drive?  If a recovery is best, how do I go about doing that?

 

Thanks in advance for your help.