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On this screen, the Optimise Mac Storage box is √ checked. If I uncheck it, do I lose all my files or do they eventually end up in the cloud? I see a lot of advice about this, but none mention this checkbox option that I can see.
I can't work out if all files will be stored in the cloud, or all files will be stored on my computer?
Yes, it is perfectly safe to uncheck that box.
When you uncheck it, the computer will start downloading your files from your iCloud Drive (if you have any files there, that are not already stored on your computer).
Unchecking usually means that more space will be taken up on your computers disk drive, but that is fully safe and does not make your computer slower or anything like that.
If you decide against it later, you can always check the box again to let the system automatically manage disk space.
Since you use iCloud Drive (as iCloud Drive is checked at the top), it is absolutely safe to uncheck the Optimise Mac storage option. No matter what you select, your data is definitely stored on iCloud, therefore it is absolutely safe to check or uncheck this option. You will not lose any data.
When you "check" optimize Mac storage it will offload the files in iCloud from your local hard drive, which means every time you want to use a non-recent file it has to be downloaded again from iCloud.
When it is "unchecked", all your iCloud Data will be stored in iCloud and on your local hard drive. Therefore, you can work offline with those files and later they will be synced.
Note: If the system detects two file versions during sync, depending on the file type, it will either ask you which version to keep or take the newer edit.
Example: You work on a pages document locally on machine A (offline). After that you make some changes to the old document online from computer B. When computer A reconnects to the Internet iCloud has two file versions. Upon reopening this file, pages will ask you what version to keep.
Use the ? icon when in doubt :)
Optimise Mac Storage works very similar to that in Photos. What is in iCloud remains in iCloud, is synced across devices and is not affected by your choice of keeping documents offline on your devices all the time or downloading them on demand.
