the real driver to me is video -- if you want to carry around a lot of movies or tv, more gigs are required. I used to think that I wanted to carry my entire music collection (about 30 gigs) with me, but with just a little bit of scrutiny I put everything I really would want to hear on my IPT at around 6gig. I have a 16 gig IPT (Xmas present), so I went ahead and loaded videos and tv (just 'cause I could). I figure if there's something I want on there's that's not there now, I can quickly resync and add it. With everything on there (including 2 feature length movies, 2 full seasons of the BBC version of The Office, my contacts, some photos, etc), I've still got about 2 gigs left.
For around town, if you don't mind updating your playlist now and then to get newer/different tunes on the device, 8 gig should be enough. If you travel and want everything, or lots of movies/tv, then 16 gig.
Or wait until later this year when rumor has it a 32gig IPT is coming.