Never format the manuscript of your novel-in-progress. Okay, okay, I know that is impossible — there is some sort of formatting going on as soon as you open a new file and start typing. What I am saying is don’t fool with formatting headings, typefaces, any of that sort of thing. Save those for the versions you (or whoever) prepare for publishing.
Instead, make it is simple as possible so it will be easy to export to whatever method one uses to prepare that file for publishing. It might be a desktop publishing program, it might be the same word processing program one used to write. But keep the two processes separate!
I generally write and format my novels in the same program, Open Office Writer. It’s definitely my preference for the writing part. Formatting? It does well enough for a normal novel, although I know it could be a tad more polished if I used a desktop publishing program. OO supposedly plays well with the powerful and free DTP application Scribus, but that is a more complex program than I really need for what I am doing.
Incidentally, WordPerfect might be about the best word processor out there for preparing a formatted print-ready manuscript for publishing. It is decidedly better than MS Word. I have set up books in WP in the past but I am so used to OO Writer now that the process has become very quick for me. And I may be too cheap to upgrade my rather old copy of WordPerfect.
So what sort of formatting do I have going on when I actually am writing? As I noted, very little, and that is primarily geared to making the process of typing and editing as painless as possible. I use an easy to read font and I make it big! I also prefer a monospaced (like a typewriter) font as I feel it is easier to spot mistakes that way. That’s a personal preference.
My current favorite — and likely to remain so — is Century Schoolbook Mono from BitStream. And I use it big, 12 or 13 point, with plenty of space between lines (but NOT double-spaced — that used to be preferred for manuscripts so editors had room to write their corrections!), everything aligned left. Incidentally, I prefer to leave a larger space between paragraphs rather than indenting on a manuscript-in-progress but this is also a personal preference. Use whatever works best for you.
Schoolbook might not be everyone’s cup of type. I would not suggest the ubiquitous Courier New. It’s not that easy on the eyes. There are ‘improved’ Couriers out there that might serve better if you want to go monospaced (such as Courier Final Draft or Dark Courier, both available free). If that is not important to you, then lots of other choices open up. Remember, you do not want something that reads quickly and easily; you want to take your time with what you wrote. You want to be able to see mistakes. That includes things like quote marks and other punctuation so make sure they show up strongly and clearly. Some typefaces that are great otherwise — frequently ones that are designed for onscreen reading ease — may have very short capital letters that can be missed when reading.
I don’t use Times New Roman, but there are worse choices for writing. And better ones. I definitely would not use it for publishing (a novel, that is — great for a newspaper). It is really a matter of what one likes, what works for one. If something about the way you are working bugs you, change it! I have learned a few new tricks with each of the twenty-one books I have turned out. Maybe I shall learn more on book twenty-two!