Q: Why can't I up-date my iPhone even though there is over 2.8gigs of room in the account?

I would just pay 99¢ and get 200 GB ... :-) ... You can revert later, if you want.

One more thing ... you should be aware of what iCloud Backup saves and what it doesn't save!

Choosing an iOS Backup Method (Should I Use iTunes or iCloud to back up ...)

https://support.apple.com/kb/HT5262

Back up and Restore your iOS Device with iCloud or iTunes

http://support.apple.com/kb/ht1766

iTunes: About iOS Backups

http://support.apple.com/kb/ht4946

Create and Delete iPhone, iPad and iPod Touch Backups in iTunes

http://support.apple.com/kb/ht4946

iOS: Troubleshooting Encrypted Backups

http://support.apple.com/kb/TS5162