Yeah - encoding a film rather than keeping it in vob format will help tremendously with the size. I hope you didn't acutally think that you had an original idea there.
Since you are talking about a home movie that is not copyrighted I thought I'd direct you to a link to a Divx tutorial in my signature. There are some easier solutions but Gordian Knot produces better results and a lot more control with just a little bit of learning.
