I'm confused on where I'm supposed to save my sketchbooks and where Arduino looks for them.
Sketches are saved in the sketchbook (though why the hell they can't properly refer to it as a folder/directory like the OS does escapes me). There is a folder/directory (or should be) in that sketchbook/folder/directory called libraries, where user-downloaded libraries are to be installed.
Saving sketches and saving libraries are two distinct activities.