Good advice from both Ehart and Marco. The combination of the iPod and iTunes is elegant, easy and powerful. There's no one right answer about the size of the iPod and the amount of compression, or lack of compression.
It's a good idea to always rip your CD's to your computer hard drive with lossless compression so that you're preserving the full quality and the flexibility to make copies at one of the lower quality mp3 bit rates with smaller file sizes to see what combination of quality, music choice and portability suits you on the iPod.
Like Marco, I keep Apple lossless files on a 60 Gb iPod and listen to it with Sennheiser PX200 headphones but I also have one of the new, tiny iPod shuffles with copies of some of those same files at 128 kbps and a pair of Sony earbuds. Those rigs represent the extremes of size and sonic quality and what works for you might be somewhere in between, like an 8 Gb Nano that Ehart recommends with mp3 files at 320 kbps.