Hi Lizzy,
A lot of what you've been thinking about, I did as well -- a small but liveable space, comfortable, but still with old-world character. It can be done, but there are a few important things to keep in mind.
The one thing that helped me the most was a book called "Get Your House Right" (terrific American grammar there). It goes through each of the very common mistakes when trying to build a traditional-looking home (of any size) and points out solutions. I'd say anyone in the same boat MUST buy this book and read it cover-to-cover:
http://www.bookdepository.com/Get-Your- ... 1402791031
Have a look at my build and shoot me any questions you might have -- always happy to help!