Files and folders is what it's all about. That's what I start people on, and (with some exceptions for fair-dinkum dummies who have difficulty figuring out any technology more complicated than a corkscrew) that's what I require people to lean. With a little one-on-one work, 80%+ of punters are OK with it inside 10 minutes. I'm not saying some of them don't forget it and need a refresher next time I see them, but most of those who get it manage to retain it.
I always start by telling them about Rule One - "Me human. You computer. Me boss!". (Do it with your best Tarzan voice, with a generous dose of gesture.) They love Rule One! And the more intimidated and confused they feel about computers, the better they respond to the notion of Rule One. I explain that Rule One works on computers, and also works with horses and dogs - oh, and don't try it on wives or husbands, it ends in tears. Once you've got Rule One sorted out, everthing else pretty much falls into place, I tell them.
So how do we do this Rule One thing? We have to know where stuff is! If you know where your stuff is, YOU are in charge - that's Rule One. If you don't know where your stuff is, the computer is in charge. Rule One!
Then we start with My Computer and navigate our way down to My Documents via C: and Users (or D&S) and so on - "this is the real place where your documents actually live - that thing on the desktop is just a shortcut, this is the real place". So I'm actually starting the on the hard part, starting them with the asinine weirdness of the default Microsoft directory structure, but I don't tell them that, and 'coz they don't know it's hard (and also 'coz they really, really want Rule One to be true), they cope with it just fine.
Then I make them do it, hands on - for example, I make them open a letter they wrote last week, starting from the desktop and navigating down the tree. Depending on circumstances, we might go on and do pictures in the pictures folder - again, always working down from My Computer and the C: drive, 'coz repetition is the second-most important key to retained knowledge. The first and most important key, of course, is salience. If I just taught people how to navigate a folder structure, no-one would pay much attention, and only a handful would understand it, let alone remember it. It's just some complicated geeky stuff, right? But by making it salient - this is the whole point of Rule One! - they pay attention, and they learn.
Rule One: give it a try, I heartily recommend it to you all.