One of the things I've discovered is that if you can print out your book, printing it out can be one of the most useful editing tricks you can do.
What you'll need
Access to a printer (hopefully one you can print on for free, if not I'll offer some suggestions in a moment), a way to keeping your printed book together (Binder, getting it bound, a big envelope, a three hole punch, etc), highlighters (maybe ones in different colors or erasable ones), pens/pencils in different colors, a notebook, flashcards, sticky tabs, etc.
Step 1: Print it out
If you can print out your manuscript for free, I'd highly recommend that (I printed some of mine off in chunks back in high school cause our librarians never charged for printing). If not, you can go to a local library or some other place where you can print it out. Find out how much it is and decide what's best for you. If you can afford to print it off in one chunk, go ahead. If not, print it off in reasonable chunks and save chunks for when you have money for those chunks.
Or you can print it off at Staples, Office Max, Office Depot, for mostly reasonable prices for printing a book off or whatever (I think at Office Max, Night Lies at about 282 pages was about $30. Not too horrible).
Make sure to format your book however you'd like to use it to edit. Printing off chapters separately, or in double space might be easier to use to edit, but if you're worried about printing costs, then I wouldn't recommend that. You can also print it off on both sides of the paper, or only on one side and make comments on the back if you don't have much room in the margins.
Step 2: Revel in the glory of your printed out story
Yes, make sure to take a moment to marvel at your story printed out. Its almost like being published but not really. Look at the pages, smell the pages, enjoy the moment of holding a clean copy of your story. Okay, maybe not smell the pages, that might be going a little too far. But you get the idea. And if you are okay sharing your writing habit, show all your friends your accomplishment now that they can hold it!
Step 3: Read through it. Then find a friend.
Before you sit down and tear your printed lovely manuscript to pieces (some people literally do tear their story apart when they're editing it), read through it first! A printed version is different from being on screen. Because its a different medium, you'll probably notice things you didn't when reading it on screen. After just reading it, find a notepad and take notes of things you need to make a note of. And yes, that means reading it a second time.
After you've gone through it twice, have a friend read it and make notes of anything they notice or make comments. Its always nice to have a second opinion.
Step 4: Break out your supplies
Next its time to take out your different colored pens, highlighters, sticky tabs, etc. Take a red or blue pen and underline miss spelled words (or cross them out and correct them then and there) or grammar mistakes. Cross out sentences or words you don't need anymore or need to change. I'd recommend using different colors for different things. Pink can be for plot holes, blue can be character stuff, yellow can be for dialogue, or whatever. Just keeping your colors seperate can not only help you be more organized and find things, but it'll make your printed manuscript all pretty and colorful. And that's always awesome. Oh, and draw some flowers or dragons, or whatever in the corners for the fun of it.
Step 5: Take your edits to le computer.
Now that you've successfully made your manuscript all pretty and marked up, transfer those changes to your manuscript on your computer. It might be tedious, but it'll be a much better manuscript. If you have any big changes to make, like rewriting chapters or putting a scene in a different chapter, do those on your computer.
Step 6: (partially optional) Do it all over again!
If you don't have the time, money, or resources to print out another draft, that's fine, but its helpful to repeat these last five steps at least one more time, especially if you think it's ready to send off to a publisher or agent. You want your manuscript to be as polished as possible.