iCloud Drive is a folder on your Mac. If you see the folder "Finance" in there, then you are seeing the folder "Finance" on your Mac. It's just a folder like any other.
Things in your iCloud Drive are copied to iCloud.com where you can see them and use them from the browser. If you have other devices connected to iCloud, then the contents of iCloud Drive can be seen and used on those other machines, as well. But, the "Finance" folder is local to you. This applies to anything you put in the iCloud Drive folder.
If you have "Optimize Mac Storage" turned on, then when your Mac's hard drive gets really full, some lesser used files will be removed to make room. (You have no control over which ones.) When you need one of those removed files, the Mac will grab the copy at iCloud.com and copy it to your Mac where it will again become a local file. You always use local files. This should all happen transparently. Perhaps the biggest downside of "Optimize" is that backups may not include all your files. I don't do "Optimize" on my Mac, though I use it on my iPhone which has way less storage. To keep the room I need on my MacBook, I put stuff on a tiny (like 1 ounce) SSD that I carry around. I try to keep 20% of my internal drive free.
So, mostly, you don't use iCloud Drive to save disk space. iCloud Drive is used to synchronize files with other devices.
This is all true in Monterey, which you say that you are using on your Mac. In Sequoia, things are rather different. In Sequoia, you can choose to keep some files on your Mac, never to be removed. And you can choose to keep some files at iCloud.com, grabbed only when necessary and then quickly returned, so that they don't reside on your own hard drive. You have way more control in Sequoia.
