Apple Music iCloud playlists and library

When I try to make a playlist I am required to choose Enable iCloud Library in Apple Music, I get a choice saying "Do you want to keep the music that's on your iPhone? If you keep it, it will be merged with your iCloud Music Library. If you delete it, it will be replaced with your music already in iCloud." Does this mean that I can't make playlists without ALL the music I already have on my phone, which I have collected for years and some of which is unavailable on Apple Music, MUST be uploaded to iCloud? And does that mean Apple can use my mp3s however it wants? Or else I can't make a playlist in Apple Music at all? And that I have to "store" an mp3 of every song in Apple Music that I put in a playlist? What a stupid way to organize it!