You will be prompted to enter a password so make sure it's something you will remember - you don't want to be teased with a backup that you can't open in times of need! For me, I entered 200 GB as it's unlikely my 240 GB MacBook Pro will ever be this full.
You will find this in the Applications folder, or like me, just call up Spotlight and type it in.
For me, I just had to browse to the OneDrive folder on my Mac and save the disk image here.
You want to save the disk image within your cloud drive folder. The beauty with a virtual drive is, even if you specified the full 1 TB as allocated space for the virtual drive, the actual space being taken up will only be as large as the files contained within.
