Okay, so salts are used for both one-way hashes and encryption. They make it harder to reverse the encryption or the hash. I think it's easier to draw the point out with hashes, so I'll write from that point of view, but the principles apply to encryption in general.
Imagine that you're saving passwords. One of your users chooses the word "kiwi" as a password. Because storing passwords in plain-text is stupid, you don't want to do that. You want to hash the password.
But, those pesky hackers out there have compiled huge databases of hash look-up tables. (Check this one out!)
So, how do we foil the hackers? By salting the user's input! The salt is a random string (or set of bits, properly) that is cryptographically combined with the user's input to produce a more secure hash.
For example, if the string to be hashed is still "kiwi" and our salt is "5m3d", a simple salt mechanism might concatenate the two into: "kiwi5m3d". The hackers probably have "kiwi" in their database, but probably don't have "kiwi5m3d". A good salting system will probably perform a much more complicated function than this.
So now the hackers need a new look-up database for each possible salt. Using a random salt means that the hacker will have to do a full-on brute force attack, rather than recycling previous computations or using someone else's look-up table.
You could choose a different salt for everything, or the same salt for all the things on your site. A different salt of each entity necessitates a new brute force attack for each entity, but it can make implementation more difficult because each salt must be saved, rather than having one global salt (which, for data which is already somewhat random, e.g. passwords, should be sufficient).
In the case of encryption, look-up tables are still a possibility, but the data to be encrypted is generally varied enough that they're not feasible. So it becomes a game of playing "guess the password". It's easy to guess "kiwi" and hard to guess "kiwi5m3d".
You will have to save the salt somewhere, because it's the only way to "know" what's been hashed or encrypted. In the case of a hashed, you compare the user's original hash against the salted hash of their input. In the case of encryption, you need the salt to decrypt the data.
Where do you go from here?
First, don't use MD5. I gave you a link to an MD5 look-up database above. The function's increasingly considered to be weak. The sha class of algorithms is a better choice.
Second, make sure you choose a good salt. Longer and randomer is better. Computers are kind of bad at generating random data. This site could be one good choice and has a pretty good break-down of how it generates its random numbers.
Third, consider salt algorithms. Simple concatenation should work, but maybe HMAC (something I don't know much about) would be better.