I'm a newbie at this also, but have read through this forum and others. This is what I have read and understand.
Most folks will save the file as an AVI for back-up or archive. You will want it as an AVI to copy back to tape for additional back-up copy of your video.
I have read that the mpeg2 decoder in MS is better than the one in MyDVD, so the idea is to save the file as an mpeg2 also, before bringing it into MyDVD.
My home video's are not the greatest quality yet, and I can not see the difference in final product no matter if I use MS or MyDVD for the mpeg2 decoding. I normaly use MS, as the sonic encoder is supposed to be the better of the two.