Open the Word Options window, and choose the Save option on the left menu. The top section has the heading "Save documents". In the last line of that section, marked "Default file location", enter the name of the folder that you want to use as the default. In this case, I've entered C:\Letters as the new setting, but you can enter any location you like. Choose the OK button when you're satisfied. You can also use the Browse button to navigate around your hard drive and find the folder you want.
While you're on the Save options screen, consider making one other handy change. Starting with Office 2007, Word uses the ".docx" file format by default. This is fine if you never have to share documents with anyone else, or if everyone you work with has Word 2007. But if you have to share your files with people who have older versions of Office, they may not be able to read these files conveniently. In order to give them a format that they can use, you need to remember to use the Save As command and change the Save as type setting to Word 97-2003 document (*.doc) every time you start a new file, so that you save it in the standard .doc file format.
Word Save Format: click for full-size imageIf you always want to create the older file format, you can make it the default choice by opening the Word Options window, and in the "Save options" section, changing the entry for "Save files in this format:". Choose the format you prefer from the drop-down list, such as "Word 97-2003 document (*.doc)". Choose OK, and the next new document you create will be saved using this format by default.
An Extra Ounce of Prevention
Prior versions of Word had a "Fast Saves" feature that fortunately has been eliminated in Word 2007. (The feature resulted in larger files that had a higher chance of becoming corrupted.) One feature that has been retained from past versions, however, is Word's ability to automatically create a backup of a file whenever you save it. This can provide some excellent protection against dumb mistakes, like deleting half of a chapter. For some reason, Microsoft does not turn on the backup feature by default. But with backups turned on, you will always have a copy of the previous version as well as your most recently saved version. (Note that this is not the same as Word's AutoRecover function that only helps you in the event of a system crash or similar event.)