1) Open up whatever graphic you want to do this on.

2) Using the pen tool, trace around your character make sure to leave an even gap throughout the whole outline because that's going to be the boarder. After you trace it using the pen tool right click and press make selection.

4) Use the eraser tool to erase the background thats inside the selection.

5) Open up the transparent layer, make sure it's underneath both the character and the background. For the arm hole I drew a small white triangle so the boarder shows up there too.

6) You can then add your title and any thing else to complete it. Ignore how ugly mine look I didn't feel like making a real cover so I made this really quickly.