Personally I prefer the .avi file type. To get a video file size to be smaller you need to compress it with a codec (divx & xvid seem to be the most popular). You can get the divx codec if you don't already have it at www.divx.com,
however, the free one download gain adware so it'd probly be better to do a search for a codec pack. I'll have to look it up at home if you want a link to a good codec pack.
Anyway, I don't know what program you're using, but there should be a section that has a part about video compression or codec. Find where you can use codec and choose divx. Once you select it you can configure the divx settings to higher quality (high filesize) to low quality (lower filesize). This is really an oversimplification of the process but hopefully you get the general idea. Let me know if/how I can help you further.