After felting this sweater I lay it out flat and inside out. That way I can make marks on it. I use a ruler or yard stick to make straight lines across the chest, just below the arm pit seams. Just examine this photo and you can see where to make your cuts.
Pull the neck and arm pieces away and this is what you are left with.
Now flip the sweater so that the side seems are laying over each other. While the sweater is still inside out, sew across the bottom, close to the bottom edge. This sweater is a little uneven along the bottom edge so I will sew across to make it straight.
I do a little trimming on the neck pieces and use them as pockets. You can position the on the inside of the bag or as outside pockets. Machine or hand stitch are both fine.
Attach cute buttons, brooches, fake flowers, or anything fun on the pockets to add a bit more color and character. I have a lot of buttons to use!
Running a supporting stitch along all the cut edges is a good idea if you plan to tote heavy things with the bag but otherwise it isn't really necessary if the bag is well felted.
I haven't stitched this one up yet but you can see what it should look like.
Save all your scraps and turn them into cute flower pins for your sweater or jacket or make cute little animals or ornaments for the tree. Several have said that instead of bags use the pieces to make a quilt. The possibilities are really endless!