Seconding here. Let me answer some of your questions and go into detail...
CDs are basically straight digitized music with no compression at a very high quality. It takes up roughly ten megabytes per minute of music, which is why a CD with over a half-gigabyte of capacity can only hold one album.
The original suggestion was, when you first rip the music, you store it in FLAC format. This uses a "lossless" compression format, which means it contains the exact same information as the CD does. Unfortunately it can only compress by roughly half, so it still requires five megabytes of space per minute of music. You'd want to keep a copy of this data somewhere, and make your working copies off it.
MP3 is what's called a "lossy" compression format. It uses psychoacoustics and essentially deletes some of the details of the music that humans are unable to hear, and only stores details for the frequencies you can. This allows you to compress it down to one megabyte per minute of music, more or less. The optimal level of compression depends on your hearing and on the equipment it's played on, and your opinions will change over time.
Further, when you make a playlist for your car, you'll probably want to do some volume equalization, so you're not constantly fiddling with the volume control while you're driving. A lot of compression software gives the option to automate this so you can quickly do this to your entire collection, but you may want to tweak those levels for specific songs or redo the equalization with different options.
By keeping the original data from the CDs in FLAC format, it gives you the ability to redo your working copy, or create different working copies for different use cases.
- Regarding being called fat: "FAT32" is an old file system used by DOS and Windows 3.1, and its legacy persists today; your car stereo may only work with flash drives that use this format. Most flash drives still come formatted to FAT32 but it's not impossible you'd have to reformat it.
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