Butterflywing - I used 5" charm squares. Found a bundle with a great price at Walmart to test this out.
The markings on the 3-1/2" template are 3/4" except for the 1" on the upper right side and I noted 'UP' on my template. Looking at the template, I turned it to the left just enough for the intersection lines to line up with the fabric squares intersecting. I think that shows in the pic. Just keep the 'up' in the same position when you move the template and all the cuts will come out the same. Either leave the cuts in place or move them to a design wall (mines on the floor) to keep them in order.