This is a three step process.
1. Go to draft.blogger.com and log in. At the top of your dashboard page, Select "Make Blogger in Draft my default dashboard"
2. Part two are Labels on Each Post.
I'm going to use this blog as an example to make this easy to understand.
At the end of this post, you'll see it lists my labels Education and Blogger. Each post has one or two categories. As opposed to what most people enter which are keywords or tags which might read: blog, blog education, how to, blogger, blog categories. See the difference?
For each individual post in your blog, you need to make sure the label box contains appropriate categories. The label box for each post is under the the compose box for Labels on the new post page. You can also manage labels in bulk from the Edit Posts page. (TIP: Select all the posts you want to be in a particular category and add that label before removing a keyword you no longer want anymore. Always add then subtract.)
3. Add label list to blog.
Click on the Layout Tab. (If you don't have a "Layout" Tab but a "Templates" Tab then let me know, you'll need to upgrade.)
You should now be on the Page Elements page.
Click "Add a Gadget"
Press the page down button twice.
You should see "Labels"
Click the Blue and White plus sign box on the far right.
Change the Title to Categories.
You are now back on the Page Elements Page.
Click Save again.
View your blog. Categories should be at the top of the column.