Memory

What is it that you are trying to do when you get this iCloud storage warning? iCloud is a syncing service, and unless you have purchased additional storage, you only get 5GB. It is used for photos, backups, etc. You cannot use the storage on the iPhone for backups, and when using iCloud photos, it uses storage in both places. The photos reside in iCloud to be synced across devices, but they are also on your iPhone, using storage there.

iCloud storage is not the same as storage on your phone.

iCloud storage is separate, it’s used to store the information on your device in the cloud - so if you were to ever get a new device you can simply sign into your Apple ID and all of your information will download automatically.

By default you get 5GB of iCloud storage, if you run out you will need to purchase more. You can get 50GB for 99 cents a month which is enough for most people.

To use the built-in storage on your phone you need to download apps, take photos & videos etc.

Generally you should only use as much storage as you need to though, if 38GB is enough to hold all your information there’s no need to use the rest.

If your iCloud storage is full you have to buy more - you can’t use the storage on your phone in place of it.

If you don’t buy more iCloud storage your data won’t be backed up which will cause issues in the future.

What are you trying to use it for? You do not indicate that. iPhone storage is used for photos, apps, data, other things that you are doing on the phone.