Top Down World Building: This involves starting at the largest element, such as a galaxy or planet, then working your way down to individual locations, such as cities and their buildings.
Bottom Up World Building: An approach at the smaller end of the scale. The focus is on a starting location and its surrounding area.
The genre of game you are planning may have an impact your decision here. For example, a science fiction RPG may require bigger picture thinking if you need a region of space with multiple star systems and planets. This would be more of a top-down approach.
For a fantasy game, the general wisdom for creating your own setting is to begin with the starting location for the players and work outwards.
However, you will need to consider your own factors when approaching this and use the methods that work best for you.
Collaborative World Building
Collaborative World Building: Invite others, such as your players to share their ideas. This can be done with either top down or bottom up approaches. It invites the players of the various characters to give input into the world. Who was their master/trainer/teacher? What god(s) does their cleric serve? What is the nature of The Festival of Spring? Name one NPC your character knows in town and why and how they know them.
Tools To Aid World Building
Assume a fantasy RPG and begin with the world. Will you develop a creation myth, pantheons of deities, and place continents, oceans, mountains, rivers, forests, plains, and deserts?
There are two approaches one can take:
* You can use the pantheons of ancient religions and use them as is, or re-skin them for use in your world.
* You can make up your own deities and religions from scratch.
Similarly, you can use real world maps or the many sources of free online maps and map generators to create your world. Or you can draw your own maps by hand, or use a drawing program, or one of the many programs designed to help you create your world map.
Magic: Will this be a high magic or low magic setting? That is, can one just go and buy the magic they need, or do they have to go adventuring to find it?
Astronomy/Astrology: Will the sun, moon(s), planets, stars, constellations, and other bodies have
names? Will there be a belief that they impact/control one's destiny?
Calendar: Will you use a real world calendar, an existing imaginary calendar, or make your own?
Nations: What are the kingdoms and empires of your world? Will you create them as they are now or develop elaborate histories? What are the conflicts, wars, treaties, boundaries, names, and rulers of these nations?
Organizations: Are there thieves guilds, trade guilds, wizard colleges, secret societies, etc.?
Adventure Locations: Where are the dungeons and ruins for the players to explore? Where are dragons and monsters located?
Villains: Who are the powerful evildoers/power hungry schemers working behind the scenes that the players may or may not interact with until much later? They initially encounter their minions.
Names: Everything will need a name: the deities, the mountain ranges, the forests, nations, cities, tribes, businesses, and people. If you don't have a gift for naming things, you can turn to one of the many online name generators or lists. I suggest making a list of names for NPCs and make a note when they are used. Be sure to re-use the first/personal names since more than one person can be named "Bob". You can also avoid naming every NPC by not going there, just be the shopkeeper or merchant or blacksmith.
Begin with the starting location: such as a village, town, or city. This will be the home base of the party. Decide if the characters are from this place and already know each other. If they are not from this place, how and why do they come here? How and why do the characters know each other?
You can plan every shop, merchant, and building, or you can decide that as a base, anything the characters need can be found here and create it as it comes up in play.
Place terrain features: Where does the settlement get its water: rivers, lakes, rainfall catchment, or aqueducts? Is the settlement on the plains, in the hills or mountains or a valley, or by the sea?
Facts about the settlement: What is the major source of food: farming, hunting, or fishing? What industries drive the economy: farming, trade, fishing, manufacturing, or supporting adventurers going to the megadungeon?
Place adventure locations and monster lairs: Decide where the nearest and level appropriate adventures will be. Will you have balanced encounters or is the world unpredictable with dread monsters encountered by even the newest characters?
Decide on other places: What is the nearest settlement? What is the name of the nation? How far to the border with neighboring nation(s)? Nearest monster group causing trouble. Trade routes, road networks, etc.
The Key: is not to do it all at once but work outward from the settlement in expanding rings. If the characters begin on foot, they won't travel more than a day or two from the settlement. So the focus needs to be within a few days of the settlement with adventures and monster lairs ready. You can use encounter tables from the bestiary of your rules system or make your own. What monsters make sense in this location, or what do you think would be cool to experience in game?
Seed clues: You can hint at the world beyond the characters' current furthest exploration. Place lost treasure maps, or letters between the villain and their lieutenants. NPCs may let slip or brag about some mythical place or treasurer. Rumors in the tavern may or may not be true in whole or part.
Open World: The bottom up approach to world building is common to the sand box campaign. The idea is that the characters decide where to go and what to do. The GM (Game Master) then only has to prepare or create the next location the players wish to go. This does not prevent the GM from preparing as much of the game world as they desire, but helps them to focus their energy on the actual parts of the game world that the players will interact.