Everything Paul says is absolutely correct. Let me sort it out a bit for you so you understand the process.
1. You shoot some video and import it into your computer. Depending on how it was recorded in your camera this could be an AVI, MOV, HDV or AVCHD file.
2. So now lets say on your computer you have a file, which you've just brought in from your camera, called "myvideo.avi" You bring this onto the Vegas timeline. What you really have on the timeline is a picture of the file.
3. Now you start to edit; you make a cut, setting an In Point and an Out Point. Nothing happens to the file called "myvideo.avi." Instead, a notation is made in Vegas that you have selected a piece of the file that you'll want to use when you render the final project. It's kind of like reading a book and making a note that when you write your book report you're going to copy of the second paragraph on page 35. The Vegas file, since it contains only notes and directions but no video, is very small.
4. Once every In Point and Out Point has been set and you've added all the FX and titles, the final step is to render your project to a final form, which can be in an AVI, MOV, AVCHD, etc., file format. When you select "Render As" you see the list of possibilities.
5. Finally, Vegas does give you the opportunity to discard bits of the file called "myvideo.ave" that you haven't used in your project. As Paul indicates, however, this is not a good idea. It really doesn't save that much space and, if for any reason you want to make changes to your project you won't be able to do so easily because the source material has been deleated.
If you haven't done so already, get yourself a big hard drive — a 500gb or a one terabite; SD video takes up about 14gb per hour, HD even more. Then you won't have to work about whether you have enough room for your projects. And once you're sure you've finished a project you can delete it from the hard drive, knowing that you've saved the camera tapes or cards that hold the originals.
Hope this helps.