As a free action at the end of any Long Rest, you can spend a brief time selecting the spells that you are prepared to cast. This largely involves selecting the foci, talismans and ingredients you need for each spell, and making sure that they are quickly available.
Your base spell capacity is equal to your Magician level plus your Education modifier. Traits can increase this value, although they can also apply limits to what spells you may select with your additional capacity.
When you select this activity, you lose all prepared spells. Then choose a number of spells whose total levels are less than or equal to your spell capacity. The selected spells become Prepared. You cannot Prepare a Spell that has a higher level than your Magician level.
As an example, Tamsin Quill is a level 3 Magician with a +3 modifier to her Education. Her total spell capacity is 6. Having completed a Long Rest, she pulls out her Grimoire to choose her spells for the day. She chooses Counterspell, which as a level three spell costs her three of her six capacity. She then chooses Enlarge, Force Bolt and Magician's Armour to round out her available spells.