#1: It depends. The main advantages of storing documents in Ultra Recall are the compression that is used and the ease of taking all of your data with you in a single file.
One note: if your files are in the same location (like a subfolder) as the .urd file, then Ultra Recall will link the document with a relative path url value so the linkage remains correct when the files and the .urd file are moved together. Advantages of linking are that the files are directly accessible outside of UR and are available to things such as desktop search (although you can export the files back out as documents from UR even if stored).
#2: With today's storage prices being so low, and the size of standard drives being so high, the issue of "clogging your drive" is often not a significant issue, but you save two ways (compression and no redundant storage) when storing your documents in UR.
#3: Probably the most natural way of storing "favorites" in Ultra Recall is simply to create a hierarchical structure of Info Items (in the Data Explorer pane). This allows you to easily rearrange them, search for them, link them to other items, annotate or store the related contents, etc.
Since you currently are storing them in an excel file, one option would be to save it as a csv file, then import this csv file into Ultra Recall using the Import Wizard (as Info Items). Another option would be to simply link or import the actual excel file as an Info Item, then
enable viewing/editing of .xls files in the internal browser.
#4: By design, if a document is stored and the linked version still exists, syncing that item will update the stored copy with the contents/keywords of the linked version.