How can I update my phone?

Go to Settings/General/Software Update.

You have 2 choices; delete some of the stuff on your phone so it has 3 GB free (as the message says) or update it using your computer—>Update your iPhone, iPad, or iPod touch - Apple Support

The last two paragraphs of the image you posted indicate what you need to do -- either clear up some free space on your iPhone, or update via iTunes.