There are several different ways to cut a shirt to make T-shirt yarn, but I think the fastest is the method I use.
Leave the shirt in two layers as if you were getting ready to fold it, with the closed edges at the top and bottom of your cutting surface and the open edges on the sides.
Cut the T-shirt into strips the width of your choice. Mine are about one inch wide, but you can make them slightly narrower or wider if you like. I wouldn't go narrower than half an inch, though, or the yarn can become less stable.
The key point about this step is not to cut all the way across the T-shirt; leave about an inch at the top along the closed edge uncut.
When the cutting is done you'll have something that looks like a hula skirt, but with the top edge closed.