Pay the guy for training, then literaly beat some guy into a bloody pulp.  You get skill increase, and when your stuff is handed back to you, you get extra bags.  I read on a site that you only get one bag, but if you do it my way, you'll get more each time.  After doing this twice, i had 8 bags total.

To keep your arrows, which appear in your inventory, don't drag them over to your pack.  They'll just disappear.  Equipt your bow, and fire them.  Then drag the new pile of arrows, from your inventory over to your backpack icon.  All is well.

Just watch out for the dreaded giant default cube below.  That seldom happens.  And it fades after a while anyway.  It follows you around everywhere you go, and you can even rotate it as the pictures below indicated.