How to Stencil a Shirt
There are a lot of ways to stencil a t-shirt, and different people swear by different methods, so I'm going to include a few different methods here. Personally, I prefer to use freezer paper. I've found the trace method to work second best. The problem with any other method is the brush you're using only needs to push under the stencil once, even slightly, and the shirt has an odd jag instead of a straight line and screams "amateurly done". Brushes pushing under templates is common. People use round sponge brushes to prevent this when stenciling, but the amount of paint that gets dabbed on the shirt creates its own problems. With a sponge, the paint is just as likely to end up under the stencil due to seepage as it is for other reasons when using a brush.
How to make your own fabric paint
The best fabric paint happens to be the same paint people think of as homemade (since they're mixing it themself). There's absolutely no need to buy the Tulip fabric paints, and since they tend to be puffy that's probably a relief to hear. Use plain old acrylic paints, but mix in fabric medium. The fabric medium will be available on the same rack as the acrylic paints, in the same little paint bottles, so can be hard to find. It will probably look like white until you look at the label. Acrylic paints can be mixed to get the color you want, then fabric medium is added to it. About 1/3 to 1/2 of the mixture should be fabric medium. Less than that and the shirt will fade quickly, more and the paint gets too runny to work with easily and layers of fabric medium can make the design look whitish. Expect to do 2 or 3 coats of most colors.
Stenciling on a black t-shirt
Do a layer of white paint then a layer of the color you want. Make sure to let it dry between layers.
Places like Hobby Lobby sell traditional t-shirts for use when stenciling, and Wal-Mart usually has a display of somewhat cheap shirts somewhere in their clothing department. Personally, I like the 100% cotton shirts from Old Navy. They have different styles in the men's and women's sections (I prefer mens, though I'm a woman). The prices on them can really fluctuate—one week they'll be 8.99$ each then next week they'll be 2 for 10$. I just hold out for a 2 for 10$ or even 12$ sale and buy 4 or 5 to last me until the next sale.
Using clear stencil sheets
These are sold beside the stencils in craft stores. They're plain uncut stencil sheets. You place them over a printout of your design, and cut the design out of the plastic with an X-acto knife. Then, you tape them to the shirt and fill in your fabric paint. I'd rate them as "okay, but not great". They definitely have a problem with raising, and cutting out the design can be time consuming.
Using contact paper
Contact paper is used to line cabinets, and removed and replaced occasionally (in theory). In my Wal-Mart, I found it on the same aisle as the jam making supplies, near the aisles of mops and detergent and stuff. Get a white contact paper, or even a lightly patterned one. The clear contact paper is just too hard to see and work with when setting it to the shirt. Again, you cut out the design using an X-acto knife and adhere it to the shirt. The sticky backing on the contact paper is what holds it down this time. I'd rate it "eugh". Despite having the adhesive, contact paper still has a problem with raising enough to let stray paint under. Peeling the contact paper from the backing and sticking it on the shirt also really sucks—you have to do it in small sections to prevent the entire piece from curling in on itself and sticking to itself. Finally, the adhesive really doesn't stick to cotton that well. Thin lines of it will start to pull up nearly immediately.
Using wax freezer paper
I was finally lucky enough to find some freezer paper sheets at an online merchant before they stopped carrying them. They were great-better than normal freezer paper even. They were cut in 8 1/2" x 11" sheets so they could be printed on in the printer, of slightly heavier weight than normal freezer paper, and had never been rolled into a cylinder. Freezer paper is my new favorite way to do things. It actually stays PUT, something which has been my struggle with every other type of stenciling.
To use freezer paper, first make sure it's freezer paper and not wax paper. Wax paper is waxed on both sides, while freezer paper is only waxed on one side. Cut your design from the freezer paper using an X-acto knife, and lay it wax side down on your article of clothing. Put a spare piece of paper over it, and iron the freezer paper into place. Put a small amount of pressure on the iron, have steam turned off, and make sure you stop ironing as soon as the freezer paper starts to stay put. Let everything cool, then paint your design. Afterwards, peel up the freezer paper.
Actually finding the freezer paper is the biggest hassle. From my investigations, it doesn't seem to be carried at Hobby Lobby, Michael's, Wal-Mart, HEB, Safeway or Randall's in either Texas or California. It is out there on some online merchants, but the place I bought it from no longer has it.
Tracing the design
This method really isn't stenciling exactly, but it achieves the same effect people are looking for and often with less hassle than stenciling. Buy a simple fabric pencil in the sewing section, and use it to trace the design in the stencil. You can even use scissors to cut the design from printer paper, and trace the shape that way (which is easier than dealing with an X-acto knife). If you completely mess up tracing the design, you can throw the shirt in the washer and try again later. If you slightly mess up, you can just retrace the right line, and later be careful to pay attention to the right line. After tracing, just use a brush to fill in the pencilled bits. I rate this one as "good". I feel like I have a lot more control over the lines, and my finished designs tend to be much straighter (which makes them look tons better). I'm honestly amazed it isn't used more often, especially for projects which are just a line of text.
Multiple colors can be used in designs, no problem. Putting one color on top of another color works okay, but wears off faster. Ideally, you can do the small stuff first then fill around it with other colors, letting the acrylic directly touch the t-shirt on each color. Doing it this way, you'd paint the eyes black first, then the teeth white, then fill in the entire red face on a monster.
Heat set the paint
More specific instructions are available on the fabric medium bottle, but the basics are to place a piece of paper or throwaway cloth over your design then iron it slowly at a fairly high heat. Without heat setting, your shirt is going to fade much more quickly.
Here's a small list of places to find free stencils that you can print out and turn into a shirt design.