Install cedar siding below overhang
If you are going to finish the soffits, do as Fresh Codemonger indicated in comments. That will allow the gap of the soffit at the wall to be closed by the siding. 

If you are not planning on finishing the soffits, add a 2X block between the overhang supports to create a straight line to finish the siding against. The added 2X which will also aid in the fastening of the soffit material if you choose to finish them later.

If you are planning on finishing the soffits, but it is not in the budget for now, temporarily fasten a scrap piece of material to the added 2X that is 1/8" thicker than what will be the soffit material thickness, so it can be removed when you are ready to add the finish soffits. The extra 1/8" will allow the soffit material to go in place over the siding and will only need a little caulk to seal the small gap left over.