don't wash it first, it's the shrinking that makes the nice "rag" look when you wash it even fluffier.
These are great instructions that you can print out, it's what I used to make my first rag quilt. Go down to the bottom of the page and click "Let's Make A Rag Quilt" for their instructions.
http://www.lovetosew.com/ragquilt.htm
The only thing I do differently now is I make my center square 2" smaller than my outer square. So if I have an 8" square, I make the center 6", that way I get the same warmth as 3 pieces of fabric but I only have to trim 2 pieces of fabric for edges. And I use flannel in the middle instead of batting.