Let f(x) = \sqrt{1+x}. Let -r<x<r (0<r<1). The Taylor Series of f(x) centered at 0 is:
1 + \frac{x}{2} - \frac{x^2}{4}+\frac{3x^3}{8}-....
The Lagrange Remainder as you posted is,
R_1(x) = \frac{f''(y)}{2!}x^2 for some y between 0 and x\not =0.
Now,
|R_1(x)| = \left| \frac{f''(y)}{2!}x^2\right| \leq \left|-\frac{1}{4} \cdot \frac{(1+y)^{-3/2}}{2!}\right|r^2\leq \frac{r^2}{8}
The term \frac{r^2}{8} determines the accuracy. Say we want your approximation to work for 2 decimal points then we require that \frac{r^2}{8} \leq .009 thus r\leq .26. Which means if you pick a fourth, that is, r=.25 then on the interval (-.25,.25) your approximation must be accurate to at least two decimal places.