I myself tend to let things flow as they go.
For inspiration, I just lay down and listen to music and start day-dreaming. that's the only planning I put into my games. (then again, I lay down all the time, so that is a lot of planning time)

As for chip-sets, I realize what I will need to my the game appear as it does in my day-dreams, and I make the tiles one by one, trying to get them to match up to what I had in my head. For the most part, the "draw the image/split it up" approach sounds like it would only work in a few instances, and maybe not for whole tile-sets.

What I'm putting in The Passing is basically this.

I lay down in my bed, I close my eyes, and I imagine myself walking through a familiar place (like if I was here, so it's in first person). I walk through every room.

It may sound weird but things are out of place. If I can include one thing, I do it.

Everything you see in Dreamscaper resulted from both ends of the process. Some of the places were mere concepts at first (and I have some still that I may use later on), while others came from song inspiration or just popped into my head one day and I thought "FUCK this needs to be in Dreamscaper lololol".

Same went with effects as well, too. As of now they don't really symbolize anything but it can mean whatever you want it to be. However there were a few that I felt were like "necessary effect"s, effects that nearly every game has: Weapon, Animal, Hairstyle, and Light. Although in some effects Natalie's hair changes style, I'm still wanting to do a Hairstyle effect for all it's own.

As for chipsets I make it from the template of the "world" chipsets with a paint program, add a new layer for the chip I'm going to make over it, then delete the "world" layer, and save it. However some don't make it in or some were reused to make others (early on, I don't do that anymore), and for the ones that do not make it in... probably will in the future.

tl;dr It's half and half. :D

I just make shit up as i go along. That's why any project i start never gets finished.

One of my biggest flaws is that I kind of make up a plot for EVERYTHING

Of course most fgs/surreal games/whatever dont have a plot, mine does.

Most of my shit just kind of relates to the fact, well, Jade's a hostage. I get some of my ideas from a lot of the dreams I've had. Such as the wing effect I mentioned, that shit really happened to me in a Harry Potter-esque Academy. Yeah man.

Coughcough well anyway I'm using my own mind as a reference soooooo yeah

tl;dr My own subconcious is my inspiration. Also childhood and the fact I just see fucked stories in general.

/BAD EXPLANATION

>>4237
Plot isn't bad. Yes, YN didn't have a plot, but that doesn't mean all fangames shouldn't.
Especially with yours, yours seems like it should be relatively plot heavy and quite dramatic!

Almost all the ideas for my game are inspired by my own dreams. Sometimes I just start randomly doodling and I get really awesome ideas from my doodles.
As for the story I make it up as I go along ( yeah I know that is a horrible way to make a story).
As for chip/title sets I work on separate pieces.