Step 2: Create a Template
Position Printouts on your canvas to verify fit. (See second image) You want ti fill out the space and get the fit right before you cut and paint your foam letters.
Cut loose blocks around your letters and blocks of foam slightly larger than the corresponding letters.
Part 4 - Go Outside, put on gloves, and spread out your dropcloth (I am serious here, this stuff is seriously sticky) and spray the back of the printed computer paper with 3M Super 77 and attach to the film coated side of the insulation foam. Keep the foam away from your line of spray to avoid getting unwanted sticky parts. Once your stick it on, is should dry in about 5 minutes.
Part 5 - Cut out your letters on a scroll saw (or band saw), a Jig Saw would work too, but not as well. If power tools aren't your thing a hacksaw or little pumpkin saw will also work but be exceptionally slow. Watch out for fingers - you want to carve foam, not flesh.
Follow along the edge of your letters, for letters with fully enclosed holes (B, R, P, Q, etc) you will have to make a small cut through part of the letter. (For a good letter carving tutorial, check out CreativeMan's "Make Signs out of Cardboard! " Ible)
Part 6 - After cutting out your letters separate the stencil from the foam. The plastic film should peel away easily along with your stencil.