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Does Time Machine backup system files, kernel files and other OS-related files?

I have corrupted system drivers and files and I want to do a fresh install of OS X but I also want to back up my applications, files and folders.

I wonder if I should go with Time Machine or manually backing up each file.

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Time Machine does not back up cache folders, files in trash, or the Spotlight index. See this question. – user495470 Feb 20 '13 at 11:30

I think I can comfort you with the following statement on the website of Apple (Update: The information cited here has been removed, but you can still find it in this archived version)

Time Machine automatically backs up your entire Mac, including system files, applications, accounts, preferences, email messages, music, photos, movies, and documents. But what makes Time Machine different from other backup applications is that it not only keeps a spare copy of every file, it remembers how your system looked on any given day—so you can revisit your Mac as it appeared in the past.

On the given page, there are even tutorials on how to restore your Mac from a Time Machine copy.

Please be aware those backups are not bootable. So you still have to manually install a fresh OS (from USB, DVD or other...)

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It is true that the Time Machine backups are not bootable, but there is no need to restore the OS first. From the page that you linked: "With your backup drive connected, start up your Mac from the Recovery system (Command-R at startup) or Mac OS X v10.6 installation disc. Then use the "Restore From Time Machine Backup" utility." – lupincho Feb 21 '13 at 19:06

Time Machine backs up EVERYTHING! That is why I recommend to use Time Machine to back up your system. If you decide to do a fresh install and only want to restore specific files or folders (like some apps, the documents folder, some music, but not the downloads folder...) you can do this via Time Machine too. You are not limited to take it all or nothing! You can pick what you like to restore, assuming you know where it is on your HDD.

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This is incorrect. Time Machine excludes many files by rule, pattern and exclusion. These rules are designed to not back up cache files, log files, things in the trash - so in the vast majority of time, no one cares about the exclusions, but Time Machine explicitly does not back up everything as opposed to duplication based solutions like CCC or SuperDuper! – bmike Feb 20 '13 at 13:59
SuperDuper also excludes some files by default, e.g. in "Backup -- all files" it says "all files on <source> will be copied to <target> except the temporary and system-specific files that Apple recommends excluding" – lupincho Feb 21 '13 at 19:10

From my experience, two of the things that it doesn't back up are: 1) My iCloud login; 2) My Dropbox settings.

When I do a full restore, I have to re-login to iCloud, Dropbox settings are set back to default and Dropbox does a full scan of my folder to confirm that it matches the cloud.

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