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Youíre getting bits and pieces of information from everyone. Iím going to try to consolidate so hopefully youíll find this easier to understand.
This is a backup of your ROM, apps, and app data. If you want to think of this in PC terms, imagine you have Windows and all your applications on your C:\ drive. All your other files (media, photos, documents, etc) are on your D:\ drive (i.e., separate partitions, could be separate physical drives, but not necessarily).
A Nandroid backup would be a flashable drive image of your C:\ drive.
A Nandroid backup is made via a custom recovery such as Clockworkmod. If youíre new to Android, this is probably too advanced for you. Do some reading about custom recoveries before diving in.
This is probably the most comprehensive backup app available. But itís not for noobs since it requires root access and the UI isnít the most user friendly. But if put in the right hands, itís a very powerful tool. It allows backing up of your apps, app data, call history, sms history and WIFI access points. Again, if you're new to Android, this is probably too advanced for you. Do some reading about root access before diving in.
This is a popular backup app thatís relatively new to the scene. Iíve personally not tried it because Iím a Titanium Backup user. But from what Iíve seen in reviews and forums, it does a good job backing up apps and app data. But itís very slow when backing up or restoring. But it doesnít require root and is more noob-friendly.
Backing up your other files is easy. Just save them elsewhere. Save them to the cloud or connect your USB cable and save them to your PC.
Other things to note:
Itís not necessary to backup your contacts if you sync them with Google. Theyíll be restored automatically if you wipe and then sign in again.
Some third party launchers (e.g., Apex and Nova) allows you to backup your homescreen configuration which you can restore later. But this is more of a per-app feature.
Restoring app data via Titanium Backup or Helium is sometimes problematic especially if the app uses push notifications.
Restoring system apps and data is not recommended.
You wonít have to pay again for apps/media that youíve paid for even if you factory reset/wipe.
Under Settings-Backup&Reset, if you toggle on ďBack up my dataĒ and ďAutomatic restoreĒ and then wipe your device, your apps will be automatically downloaded and installed upon sign-in. Going forward, expect this feature to include app data. But for now, it only restores the apps themselves.