Step 2: Turn Word/Letters Into Shapes
Now we're going to turn your word into shapes and manipulate them.
A. Click the Selection Tool ('V'), then click on your text object with the Selection Tool
B. Turn the letters into shapes. Type Menu (above) -> Create Outlines (or shift-cmd-O)
C. If you're just doing one single letter, rather than a word, skip to the end of this step. If you're doing a whole word, continue from here. Ungroup the letters. Object -> Ungroup (or shift-cmd-G)
Note: You'll need to make the letters substantially overlap so that the word sticks together once it's cut out. One way to do this is to use a cursive font that really connects the letters. The other way is to move the letters so that they overlap. That's what I'm going to do here to demonstrate. If you decide you want to try a different font, go back to the point where you create the word. You can select and delete anything you have on screen at any point, if you want to start over.
D. Now you can select the letters one by one using the Selection Tool (V) and then moving them with your mouse or with the arrows on your keyboard. If you hold down Shift while you drag the object, it will only move left-to-right or up-and-down (not diagonal). That helps keeps things in line. As you get going, you can also select more than one letter at once. Anything you do (moving them up or down, etc.) will affect all the currently selected objects.
You can see that I've made all the letters overlap. Imagine that this is a brittle piece of plastic. If you make the overlap really small, it will easily break at that point, so don't press your luck!