I have my nozzle close to the substrate that I am printing on, so that a piece of paper can just about slide underneath it freely, without catching.
Is this the right way to do it?
Traditionally, using a piece of paper (about 0.004" thick) gets you close to your appropriate standoff. However, if you adjust your layer thickness, your standoff should reflect this. Ideally, you will set your standoff roughly with a piece of paper or other type of shim stock, then "fine-tune" the standoff during a benchmark print.
If I'm remembering correctly, the ideal standoff is 1/2 to 2/3 your desired layer height.
This photo isn't exact, but may help
Edit: Whoops! Forgot to include source. This is from the Wanhao User Manual/Build Guide. I can't quite find the webpage at the moment.
Using a piece of paper won't guarantee you get exactly the "correct" height (because different papers have different thicknesses, and it's hard to determine exactly when it no longer catches on the nozzle) but it gets the bed level and the distance will be close to correct.
You can then further adjust the height by observing the first layer and making adjustments based on whether you see the first layer being squished down enough or too much. The babystepping feature (if enabled) is very useful for this.
If I may, I'll recommend heartily joining (or peeking at) the Reprap group on Facebook. They have a bunch of 'help' files there, including one on how to level the bed. In particular, it suggests doing the final height setting and levelling at the intended operating temperature so as to avoid any thermal expansion "surprises."
One inherent problem is that the stock limit switches are terrible for position repeatability. Well, not 'terrible,' but enough slop that the first layer or two may be a bit too close to the bed in some circumstances. I'd recommend at the least making sure the Z-stop is locked down good and tight once set, and then if you want to get more precise, look into other proximity or opto-sensors. I haven't done that yet so don't have any specific recommendations.