I keep a couple big plastic totes full of all the old discarded cotton clothing and towels, etc, that our family/s generate. My shop has become the place where old clothing goes to die. I usually tear a T-shirt into fourths, and cut 12" squares out of old towels. Like Stu said, I can get a whole lot of uses out of a real cloth rag. Right now, paper towels have a place for when our new puppy, Polly, makes a booboo. If I use a rag for flammable solvents, it goes outside on the dirt to dry out.

Most of the time, I can use a rag in stages. First stage will be to wipe and polish. Second stage will be to clean oily messes, such as WD-40 that I've sprayed into a crusty old derailleur to loosen it up. Lastly, the rag will get used for wiping up a nasty glob of hardened grease or something out of a pathetic old BB, or maybe a first wipe of my hand after packing my grease gun. Its trashed after that.