I grew up in military housing and our family of four lived in a 900 square foot apartment. I currently live in a house that was built in the 1940's, so most of my rooms are pretty small and the upstairs rooms have angled ceilings and dormers. Basically, I've never lived in a huge home, so I feel your pain.
(By the way, don't you all love it when you read about a 3500 square foot "small" home in a magazine!? That's huge! It always makes me laugh.)
Anyway, here are some tips to making your small space work for you.
Scale is Key
Make sure your furniture is the appropriate scale for the room. I have seen so many people stuff oversized sofas and chairs, huge TV cabinets, and overwhelming four poster beds into tiny rooms and it just doesn't work. If your room is small, use furniture that is small in scale or that takes up little visual space.
This is a picture of how my guest bedroom looked before we bought our house. It is a classic example of huge furniture in a small room with low ceilings. The room feels cramped and dark.
This is the same corner in the same guestroom. I used a full-sized bed, a small night stand and wall mounted lamps to provide function without taking up a lot of space.
I know we're all on a tight budget and it's not realistic to go out and buy all new furniture, so here are a couple of ideas you can try...Take a day and try moving the furniture around in your house. Your husband may be using a slender high boy dresser that would work better in your teeny tiny nursery. A small arm chair from your dining room might work better in your room than the overstuffed chaise lounge that blocks you from opening the closet door. Get the idea?
If you inherited a huge couch and you can't afford to buy one that is more appropriately sized for your home, see if your friends and neighbors would like to do a sofa swap. You can even put an ad on Craig's list offering a sofa for trade.
Maximize Your Storage
I see these adorable kids' rooms and I wonder, "Where are all the toys?" My son's room has a small alcove that can hardly be called a closet. For those who have nice closets, use them to the fullest. The closet standard of one shelf with a hanging rod underneath doesn't do that. Install a built-in storage system that suits your needs or, if that's out of your budget, use book shelves, dressers and cabinets to fill unused space and provide additional storage.
Photo Source: Closets Plus
Buy pieces with lots of hidden storage. A toy chest is a common thing for a kid's room, but it can take up as much floor space as a tall cabinet, you can't set anything on top of it, and doesn't provide much practical storage. Opt for an armoire, cabinet or dresser instead. Use large baskets, old crates, and pretty boxes to hide smaller toys and necessities.
Clear the Clutter
I think this is the best advice I could give and it's the easiest to do. If you don't love it or need it, get rid of it. The advantage of a small space is it forces you to edit. Don't waste visual or literal space in a small room with stuff you don't like. You'd be surprised how much bigger a room will look when you get rid of the broken toys, clothes that are too small, and things you don't use anymore. Hold a big yard sale and you might make enough cash to buy some smaller furniture pieces that work better in your space.
Again, I understand that you might have things that you love, but you don't love them in your room. I have a lot of really cool pieces from Germany - beer steins, Hummels, coasters, and dolls. They just don't really fit anywhere in my house right now, so I'm going to pack them away until I have the perfect place for them. Just because I like them and I don't want to get rid of them, doesn't mean that I have to have them on display.
Here's another example of my house, although a little extreme. This room was sooo cluttered!
It now feels fresh, open, and much larger than it is. All of my stuff is hidden away, so it doesn't spill out on the floor.
Make It Matter
Every piece you put in your small space should be one that you love or need. Don't muck up your space with a bunch of things you're settling for or feel lukewarm about. Instead of using tons of little things to accessorize, use just a few strategically placed, high impact pieces.
Take this mantle. There is way too much stuff on here. This poor girl is suffering from a common thing. Someone gives us a cute photo frame or candle holder and we feel the need to put it out. Next thing you know, your tables, mantles and dressers are covered in a layer of little things that get lost amongst each other.
Photo Source: Merry Mishaps
I have a large mantle and it has only five things on it. A large sign, a topiary, a branch lantern, and two concrete birds. One large item that is a show-stopper is going to work much better in a small space than lots of little pieces.
I hope this gives you a few ideas that you can implement immediately in your home to make it feel spacious and comfortable. There are dozens of decorating tricks (like using stripes to heighten a room), but I thought I would share things that are a little more practical. Good luck!