would I be better off...

The digital link iii is a good DAC, but with a bad USB implementation. I'm assuming you'll use USB to get the signal to the dac, not a spinner. I use a usb converter with my DLIII.
I'd recommend JRiver for music playback on your laptop. If you're going with an outboard dac, and keeping the laptop on your rack to keep the usb and coax cables short, you can run JRiver with a remote app on an iOS or Android device. It would be best to upgrade to Windows 7, if you can, not totally necessary tho.

I found the DL III to be a fine DAC and very worth the used price i see then go for here on AG. Yes the USB was included for convenience. I used a USB/SPDIF converter as well. Problem is that it only has a single coax input so makes it difficult to use a transport and computer via coax. I sometimes just like to play a CD, so I went for a DAC that had more inputs. I do like to use an external USB converter as i believe there are many high quality DACs available where the USB input is the weak link. That said, given your budget the suggestions by Realremo are sensible. I will add that I put together a Music Fidelity V-DAC and V-Link combo buying used here and E-bay for ~$160. There is a V-link for sale now here for $75. It would work well for CD quality files and streaming from Spotify. Would also allow flexibility in purchase of a used DAC.

I am not a PC user, got into the MAcs. I rip my CDs as AIFF which is equivalent to WAV for PC. I do know that for PC, JRiver is highly recommended.

you guys are wonderful. Thank you so much!

When I did have a CD changer, I'd connect it to the Digital LInk III via optical cable. I had a nice affordable glass toslink cable that I used for this. But considering everything I did on the computer side; DBPowerAmp for ripping, JRiver for playback, JPlay plugin, decent USB/coax cables, and the USB converter, the SQ from the changer was so bad by comparison, I very rarely used it. Eventually it went to the garage sale. Now when I get a new CD, I cannot listen to it until I rip it, which sometimes is a drag, but it's a sacrifice I've chosen to make.
One more thing - you asked above if 320kbps was CD quality, it is not. No mp3 is ever CD quality, although Apple has engineered a process for their 256 aac files that sounds very good. The differences between lossy and lossless music tracks can be subtle, but they are definitely there, I've heard them.
Lossless formats (1411 kbps):
.m4a (apple lossess, compressed file but uncompressed on playback)
.wav (cannot tag with track names, artist info, etc)
.flac (has variable compression rates, but is still uncompressed on playback)
.aif (mostly Apple only)
.wma (windows media, typically encodes with DRM for copy protection)

Lossy formats (320 kbps max):
.mp3
.aac, .m4a (iTunes, any bit rate on a .m4a file above 320 is apple lossless, not AAC)
.ogg (popular for streaming radio on the internet)

Labguy,
I'm not hugely knowledable in this arena but you asked if MP3 320kps is cd quality and its not. Cd quality is 1411 kbps.

On a side note, spotify premium is 320 kbps, the free version of spotify is 160 kbps, and Tidal music streamer is 1411 kbps.

For me, there is quite a difference between 320 kbps and 1411 kbps. Much of the micro details, vocal nuances, and background / underlying vocals and harmonics are very subdued if not lost completely on 320 kbps. Once you've heard this, it's hard to go back, at least when critically listening.