You have multiple devices (PS3 & HD Cable box). You have one input on your sound bar.
Because you have 2 outputs and one input, you need something to "switch" between them. In your situation, I'm suggesting that you use the TV to switch between PS3 and HD cable. Most modern home theater systems are used the same way.
Your sound bar is 2-channel (two speakers). At best, it's capable of stereo sound. You are correct that the digital audio input is "better quality" - it is digital instead of analog and is considered lossless, so using the optical output might make a small difference in quality.
Generally, if you had a 5.1 system (5 speakers + 1 sub) or a system that had more than 2 channels, I'd encourage you to use the digital audio output. As your sound bar is stereo (2 channel) - it likely will make zero audible difference. I'm also suggesting it because sometimes optical outputs can be a little harder to manage than analog RCA.. Analog RCA (red/white output) always just "works"...
Cliff's notes versions:
Using the optical output of your TV is a preferable output, but because you have a 2-channel system, I think that the sound quality improvement will be inaudible. You can try both and see if you can hear a difference..
Worst case: The digital output doesn't always work with mono (normal TV) sound sources and perhaps the sound bar can't always interpret the digital signal.
Best case: The digital output encoding works well with the sound bar and the sound bar is able to "simulate" home theater encoding - like Dolby
In the $250 range, I'm probably going to a dedicated home theater receiver. I bought an Onkyo-606 in that price range (refurbished), but then you're paying for the 5 or 7 speaker setup - so it blows your budget.
There is absolutely nothing wrong with the sound bar that you have. If you want to step up (eventually) because your PS3 has blue-ray and can play DVDs that have advance sound encoding, you'll need to step up to a 5.1 or 7.1 home theater system. With speakers, they're outside of the $250 price range. The intermediate option between what you have and full blown home theater is a "home theater in a box" type system that comes with speakers... You will hear a big difference - like a true home theater system. Sounds become directional.
Just an initial search for home theater in a box options that do HDMI switching:
See this LINK
. The price range is about $470 - $800.
Again, nothing wrong with what you have.. There are many cases when using a sound bar makes sense!