You can use VTFEdit, which is pretty handy, but I'm an old skooler, and use the command line programs manually. There are tons of guides on the internet, including the VDC, detailing the process of creating custom materials. Check them out some time; there are some pretty awesome things you can do with all the sexy shaders and effects Source has to offer.
All you need to keep in mind for this task is that for a texture to compile successfully, it needs to be a .TGA image whose dimensions are some power of two. That doesn't mean the texture needs to be square; you can have a texture that's 512 x 512, 512 x 1024, or even 2048 x 2, if you want. When saving the .TGA in, for example, Photoshop, an 8 bits/pixel image is gray-scale, a 24 bits/pixel image is in color, and a 32 bits/pixel image is in color and includes the alpha channel. For your purposes, the 24 bits/pixel variant is what you'd want to pick.
If you have trouble, let us know!