New hardrive smaller than old iMac

I would strongly recommend returning the new Mac and buying one with the same or greater storage capacity as your old Mac. If you purchased directly from Apple, then you have 14 days to return the computer for ANY reason. If you bought it from a reseller you must work within their sales policies.

Remember, you cannot put a gallon of milk in a pint container, computers work the same way!

You can't; at least not on the internal drive. If you wish to have the files stored locally, you'll need an external HDD or SSD.