The short story is that whenever you go to revisit the “Define New multi-Level List” dialog to fiddle with a lower level - BEFORE YOU DO, YOU MUST put your cursor back in a Level 1 paragraph from that outline list.
Useful reference material I highly recommend you carefully consider is
Outlining
How to create numbered headings or outline numbering in Word 2007 and Word 2010 | ShaunaKelly.com