It is important that your bike seat (saddle) is at the correct height to ensure that your bike ride is comfortable and just as importantly, to conserve energy while you pedal.

[edit] Steps

Stand and hold or prop yourself up against a wall.
Hold your brake and place your heel on your pedal. Your leg should be straight but your knee shouldn't be locked.
Look at these positions to get an idea of what is, and what is not, a good height:
- This is a good height.
- This is too low. It will make it harder to pedal. If you want to travel a long distance, it will soon become tiring.
- This is too high. Your knee is locked.
- When you are pedalling you hips will go from side to side which makes it harder to pedal in a comfortable gear.
Adjust the seat. If there is no quick release, use an Allen key to loosen and tighten the bolt.
- Where there is a quick release, slide the saddle up and down when you open it.
- When you close it, it should be firm.
- If the lever doesn't close all the way down, you may have to loosen the bolt on the other side to get the correct tension.
- If it doesn't clamp the saddle, you may need to open it up and clamp the nut on the other side.
Check the saddle to make sure it is firm.
Tighten it if it is loose.

[edit] Tips

Even though you can use your heel to get a good saddle height, you don't use your heel to actually pedal. You should put the pedal on the ball of the foot (between the arch and the toes).
It is best if you adjust the seat height while wearing the shoes you plan to ride in.
Most people choose a bike that is too small for them, and then put the saddle up high, which puts a lot of strain on the wrists, neck, back, etc. If you can get your bars a little higher than the saddle, you'll be a lot happier on the bike.