We start with a T-shirt. Fold your shirt in half lengthwise, leaving two inches or so from edge to edge, like the photo, and with your fabric scissors (or, if you're brave - a rotary cutter), cut the body of the shirt out by cutting a straight line under the arms, and cutting off the hem of the shirt.
Then cut the shirt into strips. You decide how wide you want them, but try to make sure they're all about the same. Cut all the way up to the first edge of the shirt (and slightly over), but not all the way to the end, as shown above.
Once you've cut out all your strips, open up the shirt width-wise and then open it again, along the top, uncut edge. Lay your open, uncut edge as flat as possible so you can see the edges of your strips. Cut the shirt diagonally from strip to strip. Do this for all your strips until the end. This what it looks like. Once you're finished cutting, you'll have one long piece of T-shirt! The next step is to turn it into yarn. Take your strip of T-shirt in sections, and pull it tight. The edges of the fabric stretch and roll inward, making what's known as T-shirt yarn. You can pull it as someone else winds it into a ball, just to save a step.
Dyeing (optional) I used two colors, turquoise & pink, for dying the yarn. Make sure to the follow directions on the dye package. I would advise wearing latex gloves to prevent getting dye on your hands. I learned this after forgetting to myself. Once done, here is the finished look. I didn't wind it yet but am very pleased with the color.