Wow Diana! That is a whole can of worms. Scholars cannot even agree on what exactly constitutes a myth.
For example, does a myth have to originaly accompany a religious ritual in order to be considered a true myth.
Putting that aside, I think Pegasus summed up the myth creating process; at least partially.
I'd like to add that if there is a core of history or fact, then it is considered more of a legend than a myth.
King Arthur is a perfect example of this.
Although when I use mythology in a loose sense, I like to include myth, legend, and that third area, folklore.
I like to think of myths as dealing with gods and cosmic events. They developed over a long period of time as they were told by different storytellors until somebody finally wrote some down.
They helped people better cope and understand the world around them.
I don't think they always had to be sacred; some are for fun.
Scholars also argue on how myths spread (esp. to help explain similarities).
Some say it is diffusion: a story begins in one place and moves to to other areas.
Some say it is due to the fact that we are all human and therefore if two myths from two far away places are very similar, it does not
always mean that one of the two civilizations took it from the other.