Wont let me backup iPod because not enough storage
Backup your iPod to your computer rather than iCloud. iTunes will do that for you, see the "Back up using iTunes" section here
http://support.apple.com/en-gb/HT203977

There are also third party tools that may help if iTunes fails. I used TouchCopy, and it worked well.
http://www.wideanglesoftware.com/touchcopy/