How can I use iCloud's 5 GB space with a 64 GB iPod? I am trying to understand iCloud backup and how the data from a 64 GB iPod might fit in a 5 GB account.

I just updated to iOS 5 and the latest iTunes. Now, when I sync, I get a choice to backup to iCloud (instead of backing up to the computer). I see it offers me 5 GB of space, but my as stated my iPod is 64 GB.

Does this mean I need to pay for 64 GB of space to be able to use iCloud? What is 5 GB going to do for me?

Also, I have an iPhone. Is it 5 GB per device or 5 GB per Apple ID? I use the same Apple ID on all of my devices.
A fairly good article to check out in this case is iCloud: Backup and restore overview 

You receive 5 GB per iCloud account, but you can have separate iCloud and iTunes Store accounts setup, thereby sharing music and apps, while keeping the backups apart. 

From the article:
What is backed up:

You get unlimited free storage for:

Purchased music, TV shows, apps, and books


You get 5GB of free iCloud storage for:

Photos and videos in the Camera Roll
Device settings (for example: Phone Favorites, Wallpaper, and Mail, Contacts, Calendar accounts)
App data
Home screen and app organization
Messages (iMessage, SMS, and MMS)
Ringtones