iCloud is a back up system where all your files, documents and data, photos, app data, contacts, and other stuff that's on your device are backed up. That's not the same as storage. It only keeps what is currently on your device. So if you drop your phone in a River, then get a new phone, you can use iCloud to get all your info back. You just go to settings>iCloud and sign in with your Apple ID.
Here's info: https://www.apple.com/icloud/setup/ios.html