Q: When I try to download an app it tells me I need to update my iOS

What generation Touch do you have and what iOS?  Some of the latest apps only work with the latest iOS versions because they need the features.  Check for iOS updates available for your Touch.

You need a Touch 4th or 5th generation to use iOS 6 and above if that is the problem.

To update

The Settings>General>Software Update comes with iOS 5 and later.

Connect the iPod to your computer and update via iTunes as far as your iPod model allows

iOS: How to update your iPhone, iPad, or iPod touch

A 1G iPod can go to iOS 2.2 via iTunes and iOS 3.1.3 via

Purchasing iOS 3.1 Software Update for iPod touch (1st generation)       

https://buy.itunes.apple.com/WebObjects/MZFinance.woa/wa/touchLegacyLandingPage

A 2G to 4.2.1. Requires iTunes version 10.X. If a Mac it requires OSX 10.5.8 or later. With OSX 10.4.11 you can only go to iTunes 9.X which gets you as high as iOS 4.1

A 3G to 5.1.1  Requires iTunes version 10.5 or later

A 4G to 6  Requires iTunes version 10.7 or later. For a Mac, that requires a Mac with OSX 10.6.8 or later

Identifying iPod models