My favorite way to read a small file is to use a BufferedReader and a StringBuilder. It is very simple and to the point (though not particularly effective, but good enough for most cases):

BufferedReader br = new BufferedReader(new FileReader("file.txt"));
try {
    StringBuilder sb = new StringBuilder();
    String line = br.readLine();

    while (line != null) {
        sb.append(line);
        sb.append(System.lineSeparator());
        line = br.readLine();
    }
    String everything = sb.toString();
} finally {
    br.close();
}

Some has pointed out that after Java 7 you should use try-with-resources (i.e. auto close) features:

try(BufferedReader br = new BufferedReader(new FileReader("file.txt"))) {
    StringBuilder sb = new StringBuilder();
    String line = br.readLine();

    while (line != null) {
        sb.append(line);
        sb.append(System.lineSeparator());
        line = br.readLine();
    }
    String everything = sb.toString();
}

When I read strings like this, I usually want to do some string handling per line anyways, so then I go for this implementation.

Though if I want to actually just read a file into a String, I always use Apache Commons IO with the class IOUtils.toString() method. You can have a look at the source here:

http://www.docjar.com/html/api/org/apache/commons/io/IOUtils.java.html

FileInputStream inputStream = new FileInputStream("foo.txt");
try {
    String everything = IOUtils.toString(inputStream);
} finally {
    inputStream.close();
}

And even simpler with Java 7:

try(FileInputStream inputStream = new FileInputStream("foo.txt")) {     
    String everything = IOUtils.toString(inputStream);
    // do something with everything string
}