I want to know what I need to do to have a setup where I can backup games. I do not really need anything else at this time.
Depends on what you mean by "backup games." If you want to backup your own game cartridges and play them, SX OS is probably the easiest way to do it, but it'll cost ya. SX OS is currently the only CFW that can play XCI cartridge dumps.
But now it's gotten pretty easy to just convert the XCI to an NSP, which are games you install and then they show up on your home menu, like any other game you may have downloaded from the eShop. Most people here are simply using NSPs with Atmosphere, which is free, but buying a few tools can make things easier.
I highly recommend reading through this guide:
https://nh-server.github.io/switch-guide/
I did not know using the Switch with online is an option with the hack? I don't want to risk getting banned, so it would be nice to have online as an option, but not if it could pose an issue. I have a 400gb SanDisk SD card, that I have formatted FAT32 with second partition with 32.5GB for the emuMMC partition.
Follow the guide. Many people here are able to flip-flop between a "Dirty EmuMMC" and a "Clean SysNAND" to avoid bans. The idea is that you keep all of your hacking/homebrew/piracy-related stuff on your EmuMMC, and keep it offline (or use "Incognito" or 90DNS) so that Nintendo can't ban it. Then when you want to play online, reboot into your Clean SysNAND and play your legit games. There's no safe way of playing pirated games on Nintendo's Official Servers, and there likely never will be. Alternatively, you can play games online with EmuMMC that support LAN play using switch-lan-play, or local wireless play using the ldn_mitm module for Atmosphere.
I do want to be able to have my SD card setup as exFAT if possible.
When it comes to the Nintendo Switch, avoid exFAT like the plague. Use FAT32, exFAT is very prone to corruption on the Switch especially if you're using homebrew like Retroarch that writes to it constantly. Even if you're not, some people had their exFAT cards corrupted just by playing Pokemon Sword and Shield, on Stock systems with no modification at all. There are practically no downsides to using FAT32. If you want to install a game that's over 4GB, you can either split the file or you can install it over the network or USB. In many ways installing NSPs to your console via USB is faster than having to turn off your Switch, throw the card in your computer, copy the game over, throw it back in your Switch, install the game... Just trust me on this one, stay away from exFAT and save yourself a lot of heartache. Don't get me wrong, I love exFAT on everything else, but the Switch has a crappy exFAT driver that doesn't work properly, don't risk it.