All you need is:
An old t-shirt, or better yet a bunch of them
A sharp box knife (be careful, they can be dangerous)
A sold cutting board or workbench
It's all spelled out in the video.
They're handy to have around the garage for working on your bicycle, car and such. A great way to recycle old shirts.
Step 1: Fold in half like this
Step 2: Take your box knife
Step 3: Cut
Be careful to keep the blade of the knife in contact with the table so it completely separates the shirt into 2 halves.
Step 5: Cut
Step 6: Done
Step 7: Rag bin
Take a small garbage can. Cut a hole about the size of your hand at the bottom. Bolt it to the side of an overhead cabinet.
Throw all your rags in there and pull them out one-by-one from the bottom when you need them.
For an example, watch the video in the intro step.