They're called labels. Just type your labels (categories) in the box provided at the bottom right of the compose post window. Place a labels widget in your sidebar so your visitors can navigate to your categories.
Read the article to create categories in your blogger blog.. http://www.webmindz24.com/web-design/how-to-add-categories-to-your-blogger-blog.html
I use the tool linked to above You can see it here: http://www.travelsnippetsandmore.com/ What I like about this is that you can use labels any which way you want and as many as you want. Then, you get to pick which of those labels to use as categories.
Yes, that will work too. But it means every time you add a post, you have to add the URL to your Element With the above method, the Category is just one of your labels. As you write your posts, you add the appropriate labels. If one of the Labels matches one of your Categories, that post will be displayed when the Category is clicked....you don't need to do anything extra.