Gather your supplies.
I've used the hat that my youngetst had at the hospital to ensure my hat would be appropriate size for a newborn. Though, you can use any size hat you'd like, as long as your shirt is large enough. This hat is lined so we'll be making two hats and putting them together at the end. Lay your hat at the bottom of the t-shirt, using the hem already there. Cut around the hat leaving about 1/4" for seam allowance. You'll do this twice so be sure to place your hat leaving space for another.
Make sure your pieces are right sides together then using a zig zag stitch about 1/4" from the edge sew both sets of pieces together. Double check that you're using a ball point needle when working with knit fabrics.This is what you should have now. You'll want to insert one into the other, making sure that you turn the outer piece right side out. Then I used a wide zig zag around the bottom to sew the two pieces together. The hat folds up and because it is lined there are no seams exposed. Here you can add a button, ribbon or trim of your choice. I chose to leave this one as is before sending it away to his mama.
So there you have it, simple baby hat at virtually no cost and very little time.