I cut the graph paper 8" x 27" and I didn't know if the letters were supposed to hit the edges or not, so I decided to leave an inch around the entire thing. For one thing, it's a lot easier to make a block bigger by adding on wider borders than it is to make it smaller if you overshot it (if you've already pieced it all together anyway).

It would be easy to make adjustments to this, such as leaving a half inch between letters instead of a quarter inch, and making the letters go even higher and lower. If you use different fabrics for the letters, you could leave out the background fabric in between the letters and just join them up.
This is just a mock-up to get an idea of what the finished product would look like - please please please use something like this as a guide, not specific instructions.

