Maybe 1 in 60 of my accounts reports their passwords stolen every year. For every site that reports a break-in, a few others are probably broken into and don't know it or don't report it. I would guess that if you have accounts at 30 different sites, you should probably assume that one of them gets broken into every year. You can't stop people from discovering passwords this way, but if you use a unique, strong password, you can contain the damage so that a hacker cannot leverage the knowledge of one of your passwords to break into your other accounts.
I just watched How to choose a strong password and while that's good advice, most people can neither remember nor type a good password, or at least not more than one or two good passwords. The only practical way to use a unique, strong password for every site is to use a good password manager. As such, I'm proposing a Password Manager Feature Manifesto for people to use to compare password managers and decide which one is best for them.
Password Manager Feature Manifesto
A password manager needs to do certain things to be worthwhile:
1.) Store passwords securely, in one place so you can find them, change them, secure them as a unit. It always seemed to me that storing your passwords in your browser was a little bit like taping your wallet to the outside of your front door - you are putting your valuables in the most vulnerable place. KeePassX (without any plug-ins) is completely separate from your browser. Browser integration is not necessarily bad, but I think it loose some points from a security perspective. In any case, the passwords must be secured by a strong master password and encrypted on disk (and maybe in memory when possible too).
2.) Generate random passwords - people don't manually make strong passwords. Collecting entropy for the randomness is a huge plus. KeePassX and LastPass both generate strong passwords for you.
3.) Make it equally easy to store your credit-card number or license key for Photoshop as to store a password to a web site.
5.) To be shared between multiple computers, e.g. LastPass or KeyPass/Dropbox
6.) Needs to be relatively easy to use
7.) To work on all major operating systems (Windows, OS-X, Linux). I look for this every time I choose software. I hate being tied to one vendor's operating system or browser.
If a password manager doesn't do all of those things, I'm not really interested in it. One thing that's not important yet, but I bet it will become critical for most people in the next few years:
8.) To work on your phone or other mobile device. Here is where LastPass may move ahead of KeePassX.
9.) Popular OpenSource software is recommended for security
And finally, not critical, but the icing on the cake:
10.) It's free, or at least a reasonable price.
That leaves KeePassX the clear #1 for me and LastPass #2. LastPass could threaten KeePassX if they keep improving on #6 and #8 - specifically, it is very hard to log into sites with LastPass that have the user ID on one screen and password on the next.
Sadly, no password manager can remember your operating-system login when you boot up your computer, so you have to remember that password yourself. Also, the master password for your manager. But for most people that's just 2 passwords to remember and type, and that's fairly do-able.
I have to thank DigitalMan for his contributions to this article by talking about this with me and sending articles about break-ins, security, and passwords for the past few years, and for encouraging me to improve my own password practices.
Update 2012-09-20: DigitalMan added the following excellent insights:
Re: Point 8: the iPhone now has an excellent, completely free, Open Source app which makes your KeePass database fully functional on the iPhone (and presumably the iPad as well): miniKeePass. To me, that further buries the case that Closed Source LastPass is a better option.
Lastly, Point 9 is crucial to me and not second tier. I'll leave you with my favorite Bruce Schneier quote:
As a cryptography and computer security expert, I have never understood the current fuss about the open source software movement. In the cryptography world, we consider open source necessary for good security; we have for decades. Public security is always more secure than proprietary security. It's true for cryptographic algorithms, security protocols, and security source code. For us, open source isn't just a business model; it's smart engineering practice.