Add the sugar and water to a small pot. Turn the pot on over the lowest heat setting possible and stir with a wooden spoon until small clumps of sugar form. Your goal is to clump as much sugar together as possible (minimizing the amount of loose sugar) while not creating any overly large clumps. If there seems to be too much loose sugar and not enough clumps, add 1/2 teaspoon of water and stir again. Don't add too much water or you'll end up with soggy sugar.
Let the mixture sit over low heat for 15-30 minutes, stirring occasionally. This essentially dries out the sugar into the clumps you just created. (If the mixture doesn't seem to be sticking into ball-like clumps, you can turn the heat up to medium low for 30 seconds or so, then return to low heat--just don't let the sugar melt down into caramel).
Remove from heat and let cool completely (clumps should harden as they cool!) before using.