Sorry to hear about your health issues. :(
The file locations look correct - except for Tools which should be changed to
C:\Program Files (x86)\Microsoft Office\Office12
or for 32 bit Windows
C:\Program Files\Microsoft Office\Office12
i.e. the folder that contains WinWord.exe.
Save the documents in the (default) My Documents folder and not on the desktop. You can drag the folders from the desktop to My Documents with Windows Explorer.
You don't need to associate .wbk files with Word, though it will do no harm. These files are only meant to be emergency backups.
The first two files in https://skydrive.live.com/?cid=7A797BF1CB645296&id=7A797BF1CB645296!352 beginning ~$ are apparently orphaned temporary files. If Word is closed and they remain, delete them.
I am unsure what you mean by 'I also am receiving red squares in my documents when I place them into a document.' unless you mean -
http://wordfaqs.mvps.org/redx.htm
As for the temporary files in %temp%, you can delete everything in that folder that Windows will allow (you cannot delete files that are in use). Select all and press SHIFT+Delete and they will not go in the recycle bin, but will just be deleted. Treat this
method with caution with normal files.