I also just use the folder structure in Windows. I have a folder for the year, then a folder for each month: My Documents\My Pictures\2007\10 If there is a big event, then I also create a folder inside the month: My Documents\My Pictures\2007\10\Paul and Sarahs Wedding This makes it easy to manage pictures, as no folder gets too big to browse through.
I would not recommend you reduce the size of the photos. Once reduced, the image quality is lost forever. They will look OK on the screen, but if you want to print out one day, they will never look as good, because print needs higher resolution than a monitor. If you start to run out of space on your computer, buy a bigger hard drive, they are cheap nowadays.