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I know that there are many, many tutorials out there for this type of thing, most of which better written and better photographed. But my dear sister-in-law Linda seemed to not believe them. I want to show her that not only can I do them without making a mess, but so can her brother!
Step 1: Find an image you like. Trace it onto freezer paper. As long as you put the waxy side down when tracing, there is no need to reverse the image. (And since you can only trace onto the non-waxy side, this is a no-brainer.) You can do a Google images search and narrow the search by black and white, or even outline. Freezer paper should be findable in most grocery stores; if not there, check your mother-in-law's house (that's where I get mine, but not because I can't find it in stores, only because I'm lazy).
Step 2: Cut out the pieces that you want to be painted onto the shirt. I used an X-acto knife and it was easy, tho maybe a bit time-consuming. Make sure you put something underneath your knife since it will cut your kitchen table! (Thankfully I didn't learn this the hard way.) Also, if you ever want to use the cut-outs and do a negative-style job (see here for an example), then make sure you only cut on your lines.

Step 3: Iron the stencil onto the shirt. Do this by putting the waxy-side on the shirt, covering with a pressing cloth, and then ironing. I do mine with the cotton setting and spend about 30 seconds pressing. And then because I am a freak and I get nervous, I take off the pressing cloth and just iron directly onto the freezer paper! Whoa--living on the edge. But not for too long.

Step 3 1/2: Insert some cardboard between the layers of shirt. If not, paint might bleed in the next step. I found cereal boxes work great.
Step 4: Paint! I bought my fabric paints at Michael's and they were about $1.75. Make sure they say "fabric paint." (At my store, these paints were by the t-shirts, not with the regular acrylic paints.) And feel free to paint onto the freezer paper. If you want to do two coats, read the bottle's instructions on how long before it's dry and ready for that second coat.

See how messy we were! This is about as messy as this project gets. (See the name stencils in the background?)

Step 5: After drying (again, look at the bottle for an estimate on time), peel off the stencil. It should come off fairly easily.

Voila! Isn't it great?! The lines are so sharp and stay that way after washing!

Step 6: If your design requires more than one color, wait until the first color is dry before applying the next stencil. But don't worry: the stencil will iron on top of the paint, no problem. It will then peel off fine too, without taking paint 1 with it. (You didn't think we were making shirts that encourage puking, did you?!) And then repeat the whole process.

Your final project will be, no doubt, equally as great as this! (Seriously, how great is this shirt for running a race in which we run two miles, eat a dozen donuts, and then run the two miles back?! It's perfect!)

In preparation for tomorrow's big day (!), I made this banner. I like my fabrics, but don't love them. I guess I'll have to make another for Christmas, or Halloween, or both.
I also put together a tutorial, but only after the fact, so there are no pictures from along the way. Feel to ask me any questions!
Materials:
Seven fat-quarters (or quarter-yard cuts of seven different fabrics) for the flags
One-quarter yard of fabric for the letters
3 yards double-fold, extra wide bias tape (Note: I made my own bias tape following directions found here. This is only advisable if you want a color or print that you can't find in the premade bias tape packages.)
One-half yard of muslin for backing
1 yard of 17”-wide Heat ‘n’ Bond (can be found at JoAnn or other fabric stores; it’s sold in a package)
Thread the color of your bias tape
Instructions
Prep Wash and iron your fabrics. Create letter appliquésCut 13 rectangles (sized 3 1/2” x 4 1/2”) from your letter fabric. Cut them such that the tall sides (the 4 1/2” sides) stretch from selvage to selvage to make sure you have enough fabric.Cut 13 rectangles of the Heat ‘n’ Bond just slightly smaller than the 3 1/2” x 4 1/2” rectangles you cut from your letter fabric.Attach the Heat ‘n’ Bond rectangles to the wrong sides of the fabric rectangles following the directions on the package. You should then have 13 pieces of stiff fabric.Cut out the letters from here and here. You don’t need to cut them out exactly on the lines. Just loosely around the edges will be fine.Pin the letters right-side up to the right-side of your stiff fabric rectangles. Now cut them out on the lines. You’ll need to do this twice for the “h,” “a,” “p,” and “y.” You should now have all thirteen letters spelling “Happy Birthday.”
Sew FlagsFrom the muslin, cut fourteen (14) 5-1/2” x 8” rectangles.From each of the seven flag fabrics, cut two (2) 5-1/2” x 8” rectangles.With right-sides together, lay one muslin rectangle on top of one flag rectangle and pin to secure; do this to create fourteen fabric “sandwiches.”For each fabric sandwich, sew (with 1/4” seam allowance) down one long side, turn 90 degrees and sew the bottom, and then turn and sew up the other side, backstitching at each end. This should create a sewn line in the shape of a “U” with the top open.Trim the bottom corners on each piece to reduce bulk.Turn each piece inside out and press. Make sure to get the corners as pointy as possible.
Attach letter appliqués to flagsSet your flags right-side up on your ironing board. Position the letters where you want them on the flags and iron on the letters. Again, refer to package directions for more instructions on this step. Note: Since there are two of each flag fabrics, I did mine in abcdefg-abcdefg repeating fashion. You can do yours randomly, of course.You can use scrap fabric to create a cake for the flag in between the two words. Or you can leave it plain. Follow the same directions for attaching rectangles using the Heat 'n' Bond.
Attach bias tape to banner Lay out flags on the floor in order. I lined mine up along the tops and separated them only slightly. Unwrap the bias tape and find the center. Put that center between the letters “b” and “i.” Pin the tape to the tops of the flags, with the tops of the flags sandwiched between the folds of the bias tape and shoved into the bias tape as much as possible. Note: Bias tape generally has one side that is longer. It’s up to you which side you’d like facing out, but I recommend sewing on the shorter side as it will ensure that you catch the back of the bias tape.Sew the bias tape to the flags. (See note above.)You can cut the bias tape to adjust the length to what you want/need.Hang for the next birthday and enjoy!