When you click on Save Disk Utility will speed a few seconds compressing and encrypting your folder and should prompt you to enter a password. You should use a password with a minimum of 8 characters and a combination of numbers and letters. I would recommend unchecking the Remember password in my keychain. Otherwise, if someone gains access to your computer it will supply the password for the encrypted Disk Image.

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Now that you have created a password and saved your encrypted disk image you will want to delete the original folder(since you now have its encrypted twin in the .dmg file).
Finally, locate the saved .dmg and double-click the file to open it. You should be prompted for a password, so enter the one you previously created and you are good to go.
That's it. You now have an encrypted .dmg file that you can place on a USB drive or burn to a CD or DVD and never have to worry about someone intercepting it and having access to your data. Enjoy!