I edit incessantly as I write. I've heard that this is a bad habit, but I just have trouble leaving a sentence alone until it's right.

It's only a bad habit if one uses it as an excuse to not get on with writing the rest of the scene. Don't let other people tell you not to do what works for you! rj_anderson, a fic-turned-pro writer whom I admire greatly, went down the road of trying out the "proper" way of writing (that was different from how she normally wrote), and it just made her miserable. But at least it made her realize that she needed to write the way that worked for her, even if it wasn't a common method. (She's also a polish-as-you go kind of writer)

For the "Illyria" series it's Twelfth Night.
Are you ever going to write more of that? It's my favouritest series by you. (makes puppy-dog eyes)

When I decide I need to cut out or drastically revamp a paragraph or more, I usually paste the original version at the end of the story's file along with other cut snippets.
Yes! Me too! Or in another "notes" file, or something similar.