Essentially, I turned this: an outgrown shirt and a hand towel into the swim dress.
I shirred 10 rows along one edge of the hand towel.
I sewed the short ends of the towel together. At this point you'll have what looks like a strapless towel dress. I made a 1 1/2 inch slit on each side of the towel dress where the arm holes would be. I cut the ruffled sleeves off of the t-shirt and sewed them onto the towel dress. I cut a strip of fabric from the bottom of the t-shirt and sewed it on the bottom of the towel dress as an embellishment. It would be just as cute to cut a flower out of the leftover t-shirt fabric and sew that on or anything else you can think of.
Sorry this isn't a tutorial but I hope you'll feel brave enough to experiment on your own!