@1.depends on what other (short day trips) you intend to make. Or if the difference in price is so low you think: its worth it.

@2.trains here are not planes-there is NO check-in, no controlled access (well, in most cases) and its all up to you to handle it. The main diff. between 2nd and 1st is wider seats and a more ´distinguished´ public paying a lot more for assumed better comfort. Most trains have luggage racks or sometimes special spaces for it. In general well over 90% of pax travel in 2nd-and even the sheer idea that they would not carry luggages is , well, hmm, ……...

I guess you are the tipical young bekpekker schlepping the usual oversized giant bekpek-on the main routes you will not be the only one. And even when its by now quite some yrs ago I was in OZzieland myself and using State Rail and VicRail-I do not remember any fundamental difference between trains there and here.

Please read the section about reservations! If you can afford it buy first. Never leave your luggage out of sight on trains or in stations

If you get a flexi pass (X travel days in 2 months) you have to quite slick in your travel plans, especially on overnight journeys.

A continuous pass is totally flexible and allows you the “luxury” of short and long journeys without worry or having to buy tickets for regional journeys, i.e. those not worth a Flexi Travel day.

Remembering that you are likely to be doing a lot of long distance travel I would recommend you also cosider first class. In the full scale of your budget the cash difference is small and the luxury of wider seats and some at seat service and lounge use. Also if luggage is your concern there is normally much more space in first class, not least because there are quite a lot fewer passengers in the carriage. 

There is nothing wrong with travelling second class but first is better.

Can you detail your travel plans a bit more? It always helps in helping people choose the right pass for their needs :)

In general always plenty of space on trains. Overhead racks, luggage compartments, under the seats, dedicated racks... are usually always present. (Regional) double deck trains usually are more cramped as well as some trains in the UK (like Avanti West Coast), for luggage. But never a problem in general. 

They do ask to keep luggage from corridors in the train, for security reasons. But there's always someone willing to help put your luggage up or under something, if you have issues with your luggage. 

Thank you everyone for your help :)

Thanks so much @BrendanDB however I feel that I now have all the information I was looking for :) all the best!