Thank you for telling me how you do it. This will help when I decide to take the time to get organized. So if you don't keep that many books on your Kindle, then most of your collections will show up on your K4PC, right. I tried setting some up on the Kindle but it seemed tedious and went ahead and started on the K4PC with the ones I was sure of. I get most of my freebie notices from Books on the Knob and eReaderIQ too so will start there. Just tired of seeing 86 pages of books on my Kindle although I usually know which book I want to read next. Organized in all aspects of my life, except this!!
What I found surprising about
Kindle for PC software is that you don't have to actually download the Amazon ebook to your computer in order to assign it to a collection. So I keep all of those books "in the cloud." I do have some .mobi books stored on my computer (purchased from Smashwords and elsewhere), and those are categorized in K4PC too.
It's tedious to set up collections in K4PC, as it is on the Kindle device, but keeping them organized there has worked out
much better than having all my books on the device. For me, collections became crucial when I started accumulating a lot of ebooks. With 1,500+ ebooks, I'd never be able to find anything if they weren't organized!

Initially, it seemed like an overwhelming task to organize books into collections, but I found the process less intimidating when I committed to doing small batches at a time. And since I now assign new books into collection(s) immediately, it's much easier to keep it all organized.
I hope it works out well for you!