I will take you through the steps I took to create my button. Let me know if you have any questions!
1. Design your button. You need to have some kind of image editing software. I used Photoshop Elements to create mine. I opened a new canvas and sized it to 150x150 pixels. You could also do 125x125 pixels. You just want to size it to fit the average sidebar. I chose a resolution of 300, but a lot of folks use 72. I wanted mine to look like my blog, so I used a section of my header as my picture. (Since I didn't create my header myself, I emailed Karen over at thegraphicsfairy.com to get her permission to create a button out of her work.) You could also design a button using free clip art you can find on the internet, or you could even design something out of your scrapbooking papers and supplies and just take a picture of it. Then I chose a font and typed my blog name onto my image, put a black border around it, and I was done. Make sure you save your work as a jpeg.
2. Upload your button to an image hosting site. I used Photobucket.com, which is free.
4. Copy this code into the text area:
<img src="http://YOURBUTTONLOCATION.jpg" /> <br /> <textarea style="text-align:center" rows="4" cols="22"><a border="0" href="http://YOURBLOGADDRESS.com" target="_blank"><img src=http://YOURBUTTONLOCATION.jpg></a></textarea>
Replace YOURBUTTONLOCATION with the location of your image. If you used Photobucket, they provide you with a direct link to your photo's location. Replace YOURBLOGADDRESS with your blog address:)
Let me know if you have any trouble, I will help any way I can.