1. Install the new iTunes Update (11.1.0)
2. Download the IPSW file, DM the model of your iPod/iPhone and I'll give you the DL from the Apple Server.
3. Deleted the old IPSW file and replaced it with the new one.
So does this take up 3GB or 728MB? It's saying I need at least 3GB available for storage
When it is installed it will only take up 728MB, but if you update on your device you'll need more free space at first, that's why it's better to update through iTunes.