Here's a whole load
of dishcloth patterns, you might want to start with them. There's a lot of different stitch patterns that will get you used to pattern reading and making 'fancy' stitches or pictures with the knit and purl sts. You can make them twice as wide and 3 times the length for towels.
Peacheas and Cream can be found at walmart and there's several kinds of cotton yarn at Joann's and Michaels too. You can usually get 2 dishclothes out of one ball, so for a towel you'd need only 2.
You can also knit mesh grocery bags too, if you get bored with towels and want to try something in the round. They only take a ball of the dishcloth cotton.