How are varchar values stored in a SQL Server database?

Completely pointless restriction as far as I can see. Assuming standard FixedVar format (as opposed to the formats used with row/page compression or sparse columns) and assuming you are talking about varchar(1-8000) columns.

You should always store the data in the data size that matches the data being stored. It is part of how the database can maintain integrity. For instance suppose you are storing email addresses.

If your data size is the size of the maximum allowable emailaddress, then you will not be able to store bad data that is larger than that. That is a good thing. Some people want to make everything nvarchar(max) or varchar(max).

However, this causes only indexing problems.

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