A while ago, I made my sister a tote bag by using the graphic (a Boston Terrier with a moustache) from a t-shirt as an applique. I never threw out the remaining scraps, and just came across them today while doing some cleaning.
I've been meaning to try making t-shirt yarn, but every tutorial I've seen has used a shirt that is still a tube with the front and back still attached.
So, I decided to see if I could still do it by modifying the method.
First (not pictured), I trimmed the shirt back to make a rectangle. I only used the area from the armpits down, but since you're not using the front, you could easily use the entire back (and I don't know why I didn't think of that sooner!).
Next, I folded over two opposite edges by about a half of an inch. I think I had the stretch going the right way (the stretch should run from fold to fold), but I was just winging it and didn't check.
Then, using a rotary cutter, cutting mat, and ruler (alternately, you could use a ruler to draw lines and cut with scissors), I cut lines 1 inch apart between the folded edges only- do not cut into the folded over area.
If you'd like, you can trim the uncut areas to 1 inch wide (I trimmed them at the end).
Now, and here's where I crossed my fingers that I was doing it correctly, I cut the bottom and top edges. First, I cut the bottom edge- I cut one "strip" over, and then every two strips all the way across.
Next, I cut the top edge- I started two "strips" over, and then every two strips all the way across. If you did it correctly, you should end up with one continuous strip.
To eliminate little "flags" of t-shirt sticking out of the yarn, you should trim the square corners of the strip (not pictured). If you didn't trim them earlier, you can do it as part of this step. First, cut the corners at an angle (cut off little triangles). Second, cut the "height" of the edge so that it is about an inch (you'll cut off a trapezoid shape).
The rest is just like making the yarn from a whole t-shirt! Run the yarn through your hands, stretching it as you do. This will make the yarn curl up along the edges.
Finally, wind the yarn into a cute little ball!
I used the back of small girl's t-shirt, so it didn't make very much. I do have a matching shirt (the front is destined to be a pillow), so I can make some more in the same color.
Also, this shirt was 100% cotton (pre-washed), and I tore the tag off of the shirt and stuck it into the ball of yarn so I would know what it was later.
ETA: I just realized that, for the first step pictured, I could have probably folded the fabric in half and made my cuts from the folded edge to 1 inch from the cut edge. I'll try that the next time!