I have a Hot Wire cutter for around $30. (and there is a 40% off coupon on the web from time to time also), I got at the Hobby Lobby and I used Floral Foam sheets to cut my letters out of.
There are loads of great fonts on the web, and after I made them I (low temp) Hot glued them to a full sheet of the blue foam from home Depot, that I cut into a shape.
I then drove orange light through the blue foam and into the letters. I painted only the front face of the letters and used a Christmas plug (with a light effect and remote), to make the letters glow and fade in and out.