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With the Encore you need a (DLNA compatble) server running somewhere on your network (on a NAS, a PC/MAC….) – this most be pointed toward the files collection in order to organize and make these visible for the Encore.
They easiest way, however will be to use your USB stick (or a small external HD) with the files.
When this is connected to the USB input of the Encore, this will take care of the handling.
But you must tag your files resonably (including coverpics) and you will need to detach the stick/HD each time you want to add or change something.
The Encore can connect to your home network both wired and wireless.
Always use wired if possible.
Furthermore – see here: