Re Encoding Video from Nikon Coolpix P510

Hi there People

I am a musician and am taking care of making videos for my band.
I have been using a friends Coolpix 510 i have a few questions

1. After shooting the videos at 1080p i got a file size of 650 mb for a 5 min file with a bitrate of 18000 kb/s at 29 fps

I am using power director 10 to edit these videos.
The video in its native state is not playing smoothly on my stupid laptop :mad: and plus a size of 600 MB is not appreciable for youtube upload.

What i am looking for is to edit the video to its maximum possible quality that is acceptable to the eye. something like this video in 720p setting is acceptable to me.

Also should i record in 720p and then downscale that or record in 1080p and downscale it. My target file size is about 110 MB for a 720p file.
Keep in mind i cant reduce fps as hands etc while moving look very fuzzy and vague.....:p

I am also using a laptop to capture audio thru a mixer and then would like to merge this audio with the above file. So i would like to work on the video file separately bring it down to size and then merge the audio file after having edited that. Is there a good freeware to do this.

Thanks in advance.:)