Vanilla sugar can be used in cakes, jams, cocktails and pretty much anything else that you want to add a bit of vanilla essence too. Vanilla extract is used in cooking and baking to impart a more potent vanilla flavor. Both also make for fantastic gifts.
For Vanilla Sugar: Split a vanilla bean down the middle, but not from end to end so that it stays intact but open. Scrape out some of the seeds and mash them up into the sugar with your fingers. Place the seeds and the pod in a jar and cover it with granulated sugar; avoid using baker's sugar as it tends to clump up. Use more beans for bigger jars (my jar was larger than a gallon). Let it sit for two weeks. Afterward you can remove the vanilla beans and set them aside in another jar for future use.
For Vanilla Extract: Split a vanilla bean down the middle, but not from end to end so that it stays intact but open. Place it in the plain vodka. Let it sit for a few days to get vanilla vodka (yum!). Let it sit for about 6 weeks for extract. You may want to filter some of the floaty bits out, but it's your call.
It takes time, but good food requires time. When it's done you'll have so much extract you will never need to buy the stuff again. Ever. Feel free to use the beans inside if you need to, just wash them off well before they go back in. If the supply runs low, top it off with some more vodka (Thanks Heidi, for the topping off advice!)
I'll be sure to revisit the extract a few months from now so we can see the results.