The Tooth Fairy simply takes out the tooth and puts payment for said tooth back in its place. In our house she sprinkles fairy dust (which looks a lot like fine glitter) behind her.
For full pattern and instructions, click here to download the tooth fairy pouch tutorial.
Sharon B's Stitch Dictionary is a fantastic place to get tips on embroidery stitches and Myriad Toys has the loveliest plant-dyed wool felt that I've found here in the UK. The also have lovely plant-dyed wool for felting.
This would be a good starter sewing project for children. Simply enlarge the pattern so that it's easier for their less dexterous hands to hold, use only a running stitch and keep the embroidery floss short enough to avoid knots. If the stitches are far apart add a dab of craft glue so the tooth doesn't slip through them. Or avoid stitching altogether and use craft glue for the whole thing!