If you are supposed to save user files to the Macintosh HD Data location why is there a User folder with documents/downloads/pictures etc?
And will time machine backup both data and macintosh HD?
"Macintosh HD" is the signed sealed unwritable locked System Volume, which is verified every boot up. If it fails verification as an unmodified System Volume a bootable snapshot will not be made and the machine will not boot.
The -Data Volume is
absolutely everything else on your computer.... apps you install, all settings (including System settings), and also your User directory, which is where you should save all your data.
Finder does clever merging so that what is on the System Volume and what is on the -Data volume looks like it is all one volume, like in the old days before the split. Third party apps appear in the same "Applications" folder as Apple apps even though third party ones are on the -Data volume.
Time Machine does not backup the System Volume. it backs up the -Data volume only and a Time Machine restore adds a -Data Volume back up to the System Volume. The concept of a clean install of a new System Volume doesn't have any purpose because the System Volume is unalterable. If it has been altered (corrupted) it won't boot and you can will be instructed to download a fresh one. If it boots it is OK.