Step 1:
Hover over "Catalog" with your mouse
Step 2:
Click on "Manage Categories"
Step 3:
Click on "Add New"
Step 4:
Enter in name of Category
Step 5:
Select Parent Category
Step 6:
Make "Is Active" say "Yes"
Step 7:
Make "Is Anchor" say "Yes"
Step 8:
Click "Save Category"