This was originally made for my girlfriend's birthday party, a pretty spring party with greens and yellows. But, frugal me, I'm reusing it for my daughter's fairy party which also has some green and yellow in the color palette.
Along the edge of my fabric, I cut first, about every 1/2" (in groups of four) and then rip the fabric, and repeat. If you rip your fabric instead of cutting, It makes for a
better "rag" look. In the end I have piles of five different fabrics, all the same size.
When knotting around the yarn, I take one strand off fabric and loop it in half. Put the loop under the yarn strand and pull the ends through, tug and repeat. I don't go in a pattern really, I just randomly arrange the fabrics until they're all gone. Then you can adjust them and space them for the space needed. I think mine was 1/4 yard of five fabrics and a yarn strand about 4 feet in length.