Regardless of what size iPhone you have, it's most likely a downgrade from what you're use to for an iPod. Considering the next step up use to be 30GB, you could be passing up almost double what you're actually carrying around. That's not even including space for apps. Simplify Media is an app that allows you to keep a lot more music on your iPhone as long as you're willing to be a bit patient (if you're on EDGE) and rely on always having a connection.
Simplify Media uses software that you install on your computer (or any computer, rather) to host up all the music you've got available. Each account can invite up to 30 friends to listen in to their music as well, making it really easy for you to have all your friends music without needing to fill up your hard drive space. From there you just log into the app from your iPhone with the same username and password, then let everything load up.
The first load, especially if you're on EDGE will take a while. After that you'll be able to browse through all of your music as if it was actually on your iPod app. It loads everything up, sometimes even with the cover art too. EDGE takes awhile to actually load up the initial song, but after that it is usually pretty fast on loading the rest. On 3G and WiFi, you can even press next and have it go right into the next song seamlessly.
Simplify Media is a must have app for the iPhone not just because of space based limitations, but because of all the cool little features. You can easily pull up the lyrics or band information for any song that you're streaming to your iPhone just by pressing one of the top buttons on the app itself. Unless you don't use your iPhone for music, download this app right away.