That way is the crazy way, there is a far easier way if you are just setting up your machine. The best way is to move the default profile accounts, delete existing accounts, and then create the new accounts you want, but unfortunately this requires a re-install. Basically do this (http://joshmouch.wordpress.com/2007/04/07/change-user-profile-folder-location-in-vista/), for Windows 7 (some of the keys may be a little different). I've done this on my computer, and the only thing that persists on C:\ are a couple of AppData caches, although I think they are junctions. Using mount points/junctions is a little messier (and you'll have the paths existing in C:\ as well), but may be easier.
Unfortunately, it requires hard coding the drive letter of the user partition, which may not be desirable for some people.
That said, Microsoft absolutely should support changing it optionally (they won't do it as default for compatibility with poorly written applications; this is why there is a junction at C:\Documents and Settings\ for C:\Users, etc.)
Games and applications can be installed on a separate partition, on a per-application basis. Not all applications support this, but for the most part it works well.
Some programs used their own temp settings, others use the system variable %TEMP% (which can be changed to the new partition if you'd like).
Moving existing accounts is frustrating (I've done it under Vista), but can be done.