Write a list of characters who will appear in the fairy tale. Have at least one character who represents "good" and at least one character who represents "evil." This is because a fairy tale has a moral message, and moral messages are illustrated by having a well-meaning character who faces a challenge or temptation from an evil character. The evil characters do not need to have magical powers, but they should have a feature that makes them memorable. For example, in many fairy tales, the evil character is represented as a demon, or as some kind of animal with human characteristics.
Write details for the setting of the fairy tale. Pick a setting that will engage the reader's imagination. Most fairy tales have a somewhat mystical or dreamlike setting, featuring supernatural characters and magical phenomena. A fairy tale does not need to have these characteristics, yet it is easier to engage the imagination with these qualities than without them.
Write out the themes and morals you want your fairy tale to convey. In fiction, the theme is the story's message about its subject. If you want to write a fairy tale about how drugs are bad, then write out a theme like "the evils of illicit drug use" as a theme. Write out a moral that is related to the theme, but more instructive. Continuing with the drugs example, you might pick a moral like: "don't take drugs because they can kill you" for a story with a drug theme.
Write a plot outline in bullet form. Write one bullet for each event that occurs in the story. A fairy tale should have a beginning, a middle and an ending. The beginning should establish the characters and setting. The middle should develop a challenging situation for the main character. The end should resolve the challenge or crisis. Write a series of side notes explaining how each plot point develops the moral of the story. For example, if the story ends with the main character defeating a monster only after he says "no" to drugs, the side note could read "this develops the moral of 'don't do drugs'".
Write the fleshed out story based on the outline and character descriptions. For the beginning section, use descriptive (but simple and child-friendly) language to convey the character's traits and the story setting. For the middle and ending, emphasize the plot points that develop the moral of the story. For example, if the story has an pro-family theme, go into detail about how much the lost character wants to return to be with his family. Follow the story structure you developed in the outline.