I find a lot of people are confused with what iCloud is and what it does.
What is it?
iCloud is a cloud-based service by Apple. It works to either backup or sync your data from your iPhone/iPad/Mac/Windows PC to your other devices. Apple gives you 5GB of storage free to backup/sync your devices. If you run out of space, you can either delete some data or you can buy more storage from Apple. Prices are here. If you share an Apple ID with several members of your family, you are all sharing only 5GB of free storage. If everyone has their own Apple ID, they each get their own 5GB free.
What exactly gets backed up/synced?
Ah, this is where is gets tricky. Here is a list of what iCloud backs up:
On your iOS device:
On your Mac:
What doesn't get backed up
When do iCloud backups happen from your iPhone/iPad?
Photo Stream and email:
If you want to be extra safe like me, you turn on iCloud backup for your iPhone/iPad AND you back up your devices by plugging them into a computer and using iTunes. iTunes provides a more thorough backup then iCloud.