From the privacy settings page you will see 4 blocks
1) My Privacy Groups - This will list all privacy groups you create
2) Create New Privacy Group - Allows you to create your own privacy group
3) Default Privacy Group - All modules that have privacy settings are set to this option
4) Default Values - Displays the current privacy settings per module or functionality
From the Create New Privacy Group block provide the title of your new group eg. Family, Best Friends, Co-Workers etc.
From the Extends drop down list choose if you want this new privacy group to extend another privacy group
Even the privacy groups you create will be available from this section.
You will now see your new privacy group listed in the My Privacy Groups block.
From here you can add members as well as remove members from this group.