This is fairly simple, but if you google how to make a playlist on a PSP, people tell you to just make a folder and throw the music in there. Checking out documentation for m3u files can turn off people to.

Create a new .txt, rename the file [whatevername].m3u8.
- Must have 'show file extensions' on
- Not sure if the defining the charset as utf8 (m3u8, not m3u) is necessary
Open that file up in Notepad
Paste in "#EXTM3U"
Now just paste in the file locations for each file relative to the root.
- Ex. "\MUSIC\Eminem\Recovery\Space Bound.mp3"
- Ex. "\MUSIC\B.o.B - Nothin' On You.wma"
Type each one on a new line.
Place the file in ms0:\PSP\PLAYLIST\MUSIC
- This is also where SenseMe stores it's playlists.
The playlist will show up on your PSP in [MUSIC]->[Playlists]

This is all I use my PSP for anymore...