When you're satisfied with your current level, go right from the screen north of Astoria. You will meet your partner outside the Cave of Waterfalls, looking to get in. The Fairy removes the barrier, and you can now enter the Cave.
Now that you have a second character in your group, it's good to know the controls that allow you to control other characters.
To control one of your other characters for a short time, hold down the or button. When you release the button, control will return to the character you were controlling before. This can be useful if you want to use the character with the highest luck to open treasure chests (normally Hawk).
To access the ring menu of one of your other characters, press or while the ring menu is open. This is the best way to have your other characters cast spells because while the character you are controlling is casting a spell, you can't switch characters or open the ring menu to have other characters cast spells. Also, some items cast spells when they are used (i.e. Poto Oil casts Heal Light) and these are affected by the Spirit or Intelligence of the character who uses them. Because of this, it's a good idea to use or to make sure the character that has the highest Spirit and/or Intelligence uses these items.
The Cave of Waterfalls is a nice little maze. For now, you are just trying to get to Wendel. Go down into the cave, past the Gold Statue. Save if you want, then continue into the cave and head west. This guide will typically not have directions for you. Instead, explore the caves and dungeons, and don't be afraid to go into strange rooms. There are no random encounters, so the actual number of enemies is quite low. Just don't move too fast, and backtrack to a Gold Statue if you find yourself running low on health. There's no boss here. Oh, and if you ever find yourself "Trapped!" in a room, simply clear it of enemies and the door will open again.
When you finally get to Wendel, you have two options. You can either buy armor, weapons, and items, or you can go speak to the Priest of Light. You'll do both before leaving, but you can do them in either order.
You may have noticed that you can only hold up to 9 of a single item in your ring menu. You may have also noticed that if you get more than 9 of an item, the extras will go into storage. To access the item storage menu, press . The items in your ring menu are displayed in the left column and the items in storage are displayed in the right column.
If you want to "refill" one of your item types by pulling some more of that item from storage, move the cursor next to that item type and press . This will make a cursor appear in the right column. Now move this cursor next to that item type in storage and press again. This will pull all of those items from storage and put it in the ring menu (or if the total amount of items is greater than 9, it will pull out enough to give you 9 in your ring menu). Make sure you remember to do this when you get low on healing items. Don't wait until you run out of items in the middle of a fight!
Also, notice that you can only have up to 10 different item types in your ring menu. Later in the game when you have access to many different items, it will be important to decide which items you place in your ring menu and which items to put in storage. To swap items from your ring menu and storage, first move the cursor next to the items you want to remove from the ring menu and press , then move the cursor next to the items you want to take out of storage and press again. If you want to store an item in storage without taking another item out of storage, press on the item you want to store, and then make sure the right cursor is pointing at "Put in Storage" and press again. Remember that you can't access your item storage during battle, but you can access it any other time.
The Priest will tell you that Mana is starting to fade. This is bad. He will tell you to retrieve Wisp from the Cave of Waterfalls. This is good. Wisp is the first elemental spirit. He represents Light Magic.
Before leaving the city, make sure you buy and equip the new armor for your main character (your partner started with the armor available in this town). Also, check the barrel in the basement of the armor shop to find a free Angel's Grail.
Go back into the Cave of Waterfalls. Go to the Gold Statue. As you progress, note the waterfall room where the Fairy remarks upon Wisp's presence. That room has two entrances. Go north to the second entrance to the room, and use the Fairy to cross the waterfall. Follow the path until you reach a fork and can go to the left or right. Go left first and save at the Gold Statue. Now, go back and go right, until you reach a big, empty cavern. Time for your first boss!
Boss: Full Metal Hugger
This guy is not too bad, but then again, he is your first boss. Just hit him repeatedly. If he poisons you, use Puipui Grass to cure it. Keep your HP above 30 or so and you'll be fine. He can block attacks for a few seconds by closing his eyes. He also knows Holy Ball and Heal Light, and will heal himself once or twice during a normal battle. He is weak to Dark attacks, but since you do not have Dark Saber or Evil Gate yet, the most you can do is make sure the fight takes place at night. The battle is almost over when one of his eyes vanishes.
After Full Metal Hugger is gone, Wisp shows up. He joins you. Now, leave the Cave. You'll be ambushed by Lugar at the waterfall, and thrown in jail in Castle City Jad. Your second partner will be in the cell next to you. Try the cell door and you'll be introduced. Your second partner will use a trick to open the gates, and will then join you. Head south out of the castle and to the harbor, where a ship will take you away.
If Carlie is your third character, she would have joined you in the Waterfall Cave in a scene similar to what happens if she isn't a party member. Since you're limited to three characters in your party, the "4th" character who helps you out of the prison will be left at the docks.