'Always create a backup copy' doesn't do anything (except label the file for future action) when you first save the file.
Let's assume though that you return to the file, modify it, and then click 'Save'. Normally that would simply over-write your original file, leaving you only with the modified one. But because you've requested a back-up copy, Word will save both the new version of your file and the original one.
With subsequent 'Save' operations, Word will always save the latest version of the file, together with a back-up copy of the file as you opened it.
Here's an example:
Let's say that I send a job application to Bloggs & Co. I then decide to send a nearly identical job application to Smith Ltd, so I open my first application letter, modify it a bit and, after printing it out, save it again.
Later on I get the offer of an interview from Bloggs & Co and realise that I need to know exactly what I wrote in my first application letter. If I'd simply clicked 'Save' after composing my application, that letter would no longer exist because it would have been over-written when I saved my second job application. But if I'd clicked 'always save a backup copy', my original letter would still be there.
Chris