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RDS Backups are based on EBS Snapshots. EBS snapshots are incremental, and don't include unwritten blocks. RDS has a minimum volume size that is allocated, but that doesn't mean that every block is written to. So you could have a 20GB volume, use 5GB of it, change a couple of hundred MB a day, and get through a 7 day cycle without exceeding your free allotment of backup storage. Or you could use all 20GB, but never update it again and you wouldn't exceed your free allotment. Most people who use the t2.micro, especially on the free tier, have tiny databases (well under 1GB) and so they won't ever exceed the included backup storage and have to pay for additional storage. If you need a guarantee not to exceed the included 20GB of backup storage in the free tier, then you can always set retention to 1 day.
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