By Don Kuehn

It's a story that just won't go away: the crash in housing values brought about by the subprime mortgage loan debacle. Because of the devaluation of prices on existing houses in many regions, fully one-tenth of all U.S. homeowners (8.8 million) are now "underwater," i.e., paying on mortgages that are larger than the underlying value of the house, according to Moody's Economy.com.

This is a real recipe for disaster. It sets up an incentive for borrowers to walk away from their obligations and abandon their property. Add this to the high rate of foreclosures on adjustable rate, subprime loans, and the impact casts a cloud over just about every neighborhood in America.

Any foreclosure on your block cuts the value of your home by 1.5 percent, according to Moody's chief economist, Mark Zandi. Housing prices peaked in 2006, but Zandi predicts sales will bottom out this spring and prices will continue to slump through spring 2009 with a price decline of 20 percent off their highs.

Since the 1980s, Americans have been using the equity in their homes, along with gains from the booming stock market, to finance a spending binge. In 1984, we were saving more than 10 percent of our incomes; a decade later it was 5 percent. Today, the savings rate is in negative territory. Americans are spending more than they earn.

Among the 34 million homeowners who took money out of their homes, either by refinancing or borrowing against their equity, the savings rate in mid-2006 was a staggering negative 13 percent. Although the savings rate is an inexact measure of how we're doing, it's a useful gauge of our preparation for the future. Negative savings is not a good sign for retirement or other long-range goals.

Overspending is a hard habit to kick. Put it right up there with smoking or caffeine. The days of easy credit and profligate spending on just about any luxury are over. Stores like T.J. Maxx and Marshalls are doing better than the likes of Saks and Tiffany& Co.

Sales of luxury cars are slipping in comparison with new hybrids and smaller sedans and SUVs. And people are trying to squeeze an extra few years out of their current rides.

There's a change afoot. According to Lehman Brothers chief U.S. economist Ethan S. Harris, people are going to have to start saving the old-fashioned way, rather than letting the stock market and rising home values do it for them.

So, what is the "old-fashioned way"? Well, start with a budget and a realistic look at what you earn and your fixed expenses every month. But if you are a typical American, you also have to consider how much you owe on credit cards (and at what rate of interest) as you try to put your financial Humpty Dumpty back together.

If you find that your housing, insurance, utilities, car payment and other demands have their tentacles wrapped around your paycheck, you will have to make some really tough decisions. And the sooner, the better.

Consider downsizing everything, dumping your cell phones, cable TV, that second (or third) car, dining out and shopping online. All options have to be on the table.

Then there are those longer-term kinds of savings such as insulating the attic, installing a programmable thermostat, replacing that inefficient water heater or furnace, and sealing air leaks around windows and doors, maybe even replacing windows with energy-efficient glass. All have fairly short payback times.

You're not looking for little nips and tucks here and there. If your finances are in the tank, you have to make big, life-altering cuts; you can't think the same way you did when times were better and credit was cheap.

I'd also suggest that you get on the phone with your credit card companies to "talk down" the interest rate you are paying. If your credit score is in the mid-600s or better, you might be surprised at how easy it is to get a lower rate-just by asking.

Not everyone's family finances are in the ditch. Some families (I'd like to think most) have been living within their means, have kept debt to manageable levels, have avoided the pitfalls of the real estate boom/bust, and have steered clear of the trap of "payday loans."

If that's you, the key is to keep going; save whatever you can and fully fund any retirement vehicles you are entitled to participate in. These could be IRAs or Roth IRAs, a 403(b) or 401(k) and a portfolio of mutual funds.

As long as you are in the game for the long haul, you'll have time for the markets to recover from their recent swoon. The dip that showed up last summer and fall represented a wonderful buying opportunity for those with the courage to follow their heads, not their hearts. Prices got cheap and, in many sectors, they still are.

A lot of experts these days are recommending investing in high-quality bond funds and large-cap stock funds to take advantage of the market's expected recovery. As for me, I'm staying the course with my well-balanced portfolio of no-load, low-cost mutual funds that span the breadth of the domestic and international markets. Whether the small caps or large caps lead the way out of this dip, I'll be in a position to profit.

The other advantage of my approach is that I keep trading costs and taxes (triggered by realized capital gains) to a minimum. In the race between the tortoise and the hare, I don't mind being the tortoise.

The housing crisis is going to take some prisoners, and there will be victims. Its effects are likely to hang around for a while. Even some families that aren't directly involved (renters and neighbors, for example) are going to be affected by the subprime loan/foreclosure problem. You may have to make some hard choices to get past this. In the meantime, keep a close eye on your money and position yourself for better days that will lie ahead.