A character encoding describes how to interpret data outside the very limited range of ASCII.
It is recommended to use UTF-8 (Unicode) for maximum portability.
Incorrect character encodings render text obviously wrong, misinterpreting a single multi-byte character as several ASCII characters. For example, compare AUTHORS versus AUTHORS without UTF-8 support. Character encodings are particularly important for subtitles and configuration files.
Windows Notepad defaults to Windows-1252* for all new documents (though this might be getting better) leading to potential misinterpretation by other programs. To save a Notepad document in UTF-8 hit Ctrl+Shift+S to bring up a dialogue or use a free third-party editor like Notepad++.
* Windows might incorrectly call Windows-1252 ANSI