If only I could remember how I did that… ?
Alright, my standard approach is this: use a 512 GB image for your Windows installation (Drive C:). Use a 2 GB image to install the game to (Drive D:) and store the iso files (mount as Drive E: in Win95). This way, you can mount different 2 GB images in different profiles, allowing you to install dozens of games. The Win95 image always stays the same, so while you have all games installed there, you can obviously only lauch the game that has its corresponding 2 GB image mounted in the current session.
Anyway, that should give you plenty of headroom to install almost any Win95 game. Hopefully, this will also prevent your Win95 installation of getting corrupted with every crash. Unfortunately, Windows 95 was a buggy mess even on a real PC, and I can’t even tell how many countless times I had to completely reinstall this piece of garbage back then. I did a reinstall almost every month.
To prevent any major data loss, I’m doing the same thing as you: always keep a working backup of your C: drive stored away, just in case. I did not have any data loss though for a very long time (>year). I think that by separating Win95 and games installation image, you get a much more robust setup.
One thing to make sure whenever possible is to shut down Win95 via Start -> Shut Down Computer, then wait for a couple of seconds even after the “it’s now safe to power off your computer” message has appeared (because sometimes it’s actually not safe yet). But even if you fail to do that, you should usually just get the chkdsk bootup check on your next launch, but without any actual data loss.