I've had a 12 people tell me 12 different ways to determine this. By far the most useful method I have found is the sit on your bike by a wall, turn the cranks to 12 and 6. The heel of your foot should touch the 6 o clock pedal with your leg straight.
Another preferred method (ala sheldon) is to keep raising it in small increments until your knee starts to hurt. At that point, you know it is too high.,
Having your saddle too low can mess up your knees and is also less efficient, as you are not able to apply maximum force throughought your spin and can't engage all the muscle groups.