I'm too cheap for that - I used old wool sweaters and blankets. If they aren't already felted, toss them in the washing machine with a pair of jeans or something else that is "tough" (like an old tennis shoe) and wash/agitate them for a while. Then dry them in the dryer.
When I ran out of our family's old sweaters, I bought a couple at the thrift store for 50 cents. I also found an old wool blanket there for $2 - it had a hole in it but it was fine for my purposes. I made a LOT of potholder from that one blanket.
I think wool is a great insulator, and it's not as hard on your needles.