Study the album art you like. Make a note of what styles interest you and what elements (e.g. text, photos, pictures) you want to incorporate in your design. Then decide whether you want just a cover, a cover and a booklet, or a full package, including the CD art.
Sketch a rough composite that details the elements you want to use. Will your cover have text? If so, what font will you use? What color will it be? This step is important because you can get an early sense of what will work and what won't. There's nothing more frustrating than working for hours only to discover that you have no idea how all the pieces will fit together. Sketches help minimize problems later.
Open Adobe Illustrator and/or Photoshop, and create similar mock-ups on your computer. Let's say you want a palm tree on the cover. You could start with an existing photo, or you could draw it using the vector-based program Illustrator. However, if you'd rather use an existing photo or draw a picture by hand and scan it, stick with Photoshop for customizations. Take time to sketch various ideas to see how they will look digitally. Perhaps something you draw by hand doesn't look as good on the computer screen. This is the time to work out the kinks with your design.
Visit the Designers Toolbox online and choose a CD template (see link in Resources). The toolbox offers die-lines for everything from an accordion pack to a six-panel fold. Download the .eps file.
Open the .eps file in Illustrator or Photoshop. Now you have the template of your canvas.
Use oversized dimensions (1000 pixels X 1000 pixels) at a rate of 300 pixels/inch in RGB mode with a white background. This will ensure you work in the highest quality possible. If these exact dimensions don't work with the template you chose, you can vary the dimensions but work on a large scale.
Construct the different elements of the design separately. This way, you have more control over errors. If something goes wrong with an element, you can rework that one element instead of sorting through your Illustrator and Photoshop layers.
Piece your elements together on the template once you've perfected each one. There's no one right way to do this. Pay attention to how you want the elements layered. If your album art has goofy figures standing on a sand dune, place the dune on the canvas first then the figures on top of the dune. Use shadowing effects and other merging tools to blend the elements together.
Finalize your album art with additional textures and filters as you see fit. Don't go overboard with Photoshop filters unless you're going for a particular heavily tweaked look.
Print one copy of your finalized file on the proper type of paper. You can buy pre-made blank jewel cases or digi-packs and print a cover and backing that will stick to the blank cases. If you have access to a professional printing company, you can e-mail them the file (as a hi-res, .pdf or .eps) to print directly onto a digi-pack or glossy paper.
Proof your printed copy to make sure everything looks and reads as it should. Then print the number of copies you need.