most FAQ's or guides on kernel compililng will tell you to put it in /usr/src mainly because it makes sense to put it there if you're going to be looking for it in the future. Just think, src is short for source, so if you have source code for the kernel you'd put it in there. However, you can put it anywhere, and if you still want to adhere to what a guide says in terms of thinking about the /usr/src/linux directory you can make a symbolic link from there to where ever it is that you put the source code to your kernel. For example, say if you had 3 copies of source code for different kernel versions, 2.4.24, 2.6.7, and 2.6.10 and you weren't sure which one you were going to be using or when, you could easily symlink a generic /usr/src/linux link to whatever version of the kernel you wanted to compile for testing. On my computer I have a 2.4.24 version and 2.6.7 version of source code. When compiling the 2.6.7 I made a sym link to that directory like this: directory name /usr/src/linux_2.6.7
ln -s /usr/src/linux_2.6.7 /usr/src/linux
So anytime you cd'd into /usr/src/linux it would actually take you to the /usr/src/linux_2.6.7 directory instead. This makes it easier for anybody using the system that goes looking for the source because it is in a standard link / standard location. Notice that you can put the actual source anywhere like /home/user1/sourcecode/2.6.10 or something, just link /usr/src/linux to there instead and you'd have the appearance of a standard location even though you actually have the source elsewhere. You don't need to do this of course, but for clarity it makes things simpler.
Now for the space issue. The kernel source code is much bigger than your compiled kernel is going to be. I think the source is something like 30-40 meg? At least the source from http://www.kernel.org/pub/linux/kernel/v2.6/
the archives are in that range.
When you compile the source the kernel image will still be relatively big which is why you'd want to issue the 'make bzImage' after you finished compiling which will shrink the size down to something more manageable. Sometimes this is done for you, although issuing that command will simply overwrite it so I don't think there is any harm in running it again. That will put the image into the arch/i386/boot/bzImage location (or whatever architecture you are building for). At least that is my experience on slack, but I think this is a standard practice. The bzImage is the image you would copy over to your /boot directory. If you're booting with Lilo or grub you can name the image whatever you want and just make an additional entry into your boot manager (lilo, grub, etc.) to have this kernel added to the menu. It is an excellent idea to do this just in case your kernel doesn't boot correctly, that way you'd have a backup to boot to and your system would still be useable.
Don't worry, it'll probably take you a couple of tries to get the right kernel compile that you want, but after you do it a couple of times it'll be old hat. If you happen to get it right your first time, then congratulations!