I would say go with method 2, as it will take up far less memory, which is obviously a good thing. If your game is small (pong clone, pac man, whatever else), and you don't have a ton of assets, then no it wouldn't be a huge deal. But think about it, say you have a image that will only be used for the menu, why keep it in memory if you don't need it?
Exactly what I was thinking. My game is slowly getting bigger and bigger, and it occurred to me that method 1 (which I had used for smaller games) would not be a good idea for a more advanced game.
Loading a 1mb background picture for the menu and keeping it in the memory during gameplay when it isn't needed seems like a bad idea.