Open up your image and check Image » Mode to see that RGB is selected in the menu.
Now, go to QuickMask Mode by pressing Q—Make sure that “QuickMask Options” (see button on main toolbar) are set to Selected Areas. Use the Paintbrush to fill in the the first area you wish to colorize (should appear in red)… e.g. paint in the face, neck, arms, hands, etc. in preparation for coloring it with a flesh tone (see below example).
Go back to Standard Mode by pressing Q and a selection should now be around the area you filled in with the Paintbrush. In the following step, your selections will be saved as a Layer Mask you can restore later—however if you’d like, you can store your carefully made selections for safe-keeping by going to Select » Save Selection, and name the selection after what you just outlined in your image (for instance, I’ve named my selection skin).
Next, click on the Adjustment layer icon at the bottom of the Layers Palette and choose “Color Balance” from the menu. Adjust the sliders for Shadows, Midtones, and Highlights, until you find the color you’re looking for. It doesn’t have to be exact yet—you can always go back and continue adjusting at any time by double-clicking on the Adjustment layer icon for the layer you wish to edit on your Layers Palette. And chances are, you will end up needing to go back and make adjustments, once you begin to see all the colors in context with each other.
When you have the color you want for that area, repeat the whole process over again for the other spots of the photo that need colorizing. Once you’ve got color using your Color Balance adjustment layer, you can also make additional adjustment layers to further adjust each color layer, such as Brightness/Contrast, Hue/Saturation, etc (just load the selection by holding the Command key (PC: Ctrl) and clicking on the adjustment layer, and add a new adjustment layer as in Step 4).
There you have it… from black-and-white or faded, to full color! Feel free to download the layered PSD file of this example so you can study how the effect works.