Stacy's tip about a little soap and soda in your water works great for the slack bucket, too. Not only does the baking soda reduce or eliminate flash-rusting, the soap breaks the surface tension and allows the grit and gunk to sink to the bottom instead of floating on top. So you're not constantly putting filth back on your belts everytime you dip a blade to cool it. Belts last longer and you get cleaner grinds.
I'm currently using plain water when hand-sanding up to 400 grit, I find it cuts the fastest. I have used Windex and that works too. After that I switch to Mobil 1 for polishing with higher grits. If I want a 600-grit finish, I sand to 800, and so forth, then come back down to the "final" grit. My last step is to sand completely dry on a very clean blade. One long, smooth stroke and move to a fresh area of the paper.
The most important thing is to get the blade ground/filed properly in the first place, and actually finish each sanding step before moving on to a finer paper. If you jump to 400 before the blade is flat and even at 220, you're in for a long day. Conversely, once you have a really nice surface at 400, higher grits go pretty quickly. High-grit finishes look awesome, provide the least opportunities for staining and rust on the blade, and really don't add much extra work.