First, there are two shortcuts that I find to be really helpful.
Free Transform - Ctrl-T (PC) or Command-T (Mac)... I use this to make the picture fit the photo spot before grouping and also to size the elements .
Group w/ previous - Ctrl-G (PC) or Command-G (Mac)... this is used a lot in templates to group the paper with the element below it and the paper automatically becomes that element w/o distorting or frustration trying to size it to fit the element... you'll see what I mean when we start going through this tute.
OK, let's get started. I picked out a template that had lots of different colors so you can see a little easier how this all works.
Once I picked out my template, I opened the .psd file... this is important because then you can see all the layers, so make sure you open the .psd file and not the .jpg file. You'll see in a bit why you need the layers.
On the lower right hand corner you can see all the layers for this particular template. See the little "eye" icon? You can click/toggle each layer on and off depending on if you want that particular layer in your layout. You can also drag each layer up or down to move that layer above or below another layer. You will be clicking on each layer in that corner depending on which layer you are working on at the time.
Click on the pictures to see them full sized
Now the fun begins... we're going to change the elements on this template. Now that you learned how to "group w/ previous" the next few parts are really simple. Now we're going to change the paper elements from the solid color blocks to paper blocks. We'll do the same thing we did with the picture only I normally don't resize the paper.
The next step is to decide what papers you want to use for the paper blocks. Then you will drag or copy/paste the paper over the block layer. Next you'll group w/ previous (ctrl-g or command-g) and voila you have your paper block... sometimes I do want certain parts of the paper to show like a big flower so I'll free transform (ctrl-t or command-t) until I see what I like as you can see in this example.
paper layer above paper block layer on the lower right hand corner
another example... paper layer above paper block layer in your layers
after grouping w/ previous
and another example...
paper layer dragged or copy/pasted above the frame layer
and group w/ previous