If you're like most Americans you have a large stack of unworn t-shirts - promotional t-shirts, old t-shirts, ill fitting t-shirts - taking up precious space somewhere in your home. Good news! Those shirts aren't eyesores, they're future rugs and bowls and potholders and, and, and...
Some people recommend using only t-shirts knit the round (i.e. no side seams) to make t-shirt yarn, and I don't disagree that they make the nicest yarn, but my goal is to take something unwanted and make it into something useful, so I'll use whatever t-shirts I have in front of me. In the projects I've done, the seams are easy to tuck away and not noticeable as part of a finished rug.
Start by slicing off the hem your t-shirt. It's too thick and won't roll in on itself nicely the way the rest of your shirt will.
Now you're going to cut your shirt in strips, starting from one side and stopping 3-4" short of the other side. A rotary cutter and straight edge make quick work of this project, but you can use scissors. Depending on what you're intending to make with your t-shirt yarn, you might want your strips to be narrower or wider than mine. I'm going to use these to make a crocheted rug, so I'm cutting mine between 1.5" and 2" thick, depending on the weight of the fabric. A flimsy tissue knit will need to be cut thicker than a heavy 100% cotton jersey.
At the underarm, slice all the way across the t-shirt. Put aside the sleeves and chest for another project that can make use of smaller lengths (like a nice tassel garland or rug hooking or all manner of useful things for babies).
The body of your shirt now looks like a rib cage. You're going to want to cut through the "sternum" to make a spiral. From the bottom of the shirt cut diagonally across to the top of that same strip. Repeat working from right to left (or left to right - it doesn't matter as long as you're consistent) until you reach the top of the tube.
That's it! You can wind your ball up - I used a knitting ball winder - but you could also do it by hand.
Below are two rugs I've made with t-shirt yarn. The first is a wonderfully squishy crocheted rug and the second is more of a trivet-sized braided rug. By the way - learn from my painful mistake and don't use t-shirts to make a braided rug. I think because the fabric has so much stretch to it, the process of hand sewing the braid is pretty painful.
T-shirts come in every color you could possibly imagine and are available by the pound at Goodwill outlets and most likely for free from everyone you know, so you can cover your floors in handmade rugs without breaking the bank!