Long way of doing things (new files need to be added to staging area before building the gem)
git add . && gem build my_gem.gemspec && gem install my_gem-0.0.0.gem
If using Bundler to generate the gem (rake task does the same as above)
git add . && rake install
This way you don't need to rebuild the gem after every change
gem 'my_gem', :path => '/Users/me/path/to/my_gem'
gem 'some_gem', :git => 'https://github.com/User/SomeGem.git', :branch => 'some-branch'
bundle exec my_gem_command
Note: if you point to a local gem "A" and that gem internally references/requires another local gem "B" which you wish to run locally, then you need to open the Gemfile for the top-level application and modify it to use the same Bundler trick again gem "b", :path => "path/to/local/b/gem"