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Americans are more worried about the struggling global economy than anything else. Internet blogs discuss gloom-and-doom scenarios. Newspaper headlines refer daily to the worsening credit crunch. Water coolers are buzzing with catch phrases like "subprime mortgages" and "collateralized debt obligations." What does it mean for you?

At first this financial mess only affected the high net worth individuals on Wall Street and the staffers who work in the mortgage industry. However, within the past month, the scenario has gotten much worse and now affects everyone from Wall Street to Main Street. The Federal Government passed a $700 billion Economic Stimulus Act to alleviate pressure in the credit markets. Now is the time to learn what this financial crisis means to your personal finances.

Credit Crisis 101

Most people are under the impression that this current financial crisis is too complex to be understood, which is only partially true.

The most basic part of the current financial crisis involved a bubble in home prices. This started in the era of former Federal Reserve Chairman Alan Greenspan with low interest rates. Mortgage brokers and banks encouraged homeownership through interest-only and adjustable-rate loans. These loans made homeownership within reach to customers who couldn’t really afford a mortgage.

Everything was fine when housing prices were increasing, but then the bubble burst. This caused foreclosures, leaving the banks with billions in losses.

But that isn’t the whole story. Many of these loans were then packaged into more highly complex financial instruments and sold with high yields known as collateralized debt obligations. Everyone was happy, including bankers, investors and homeowners. However, the key word is obligation and the risk involved the creditor not being paid in full. Banks such as Lehman Brothers, who was leveraged at 30:1, started hemorrhaging money and the losses compounded fast.

Wall Street Fallout

Currently, three financial institutions have come out on top, including Bank of America, Citibank and JPMorgan Chase.

Bank of America bought out Countrywide and is acquiring Merrill Lynch. Citibank is bidding against Wells Fargo to acquire Wachovia. JPMorgan Chase bought Bear Stearns and Washington Mutual.

Other notables include Mitsubishi UFJ Financial Group buying a 20 percent stake in Morgan Stanley, as well as Barclays buying the higher-quality assets from Lehman Brothers. Goldman Sachs will also be getting a $5 billion boost from sale of stock to Warren Buffett’s company, Berkshire Hathaway.

Main Street Consequences

All of this is big news for the financial industry on Wall Street. But how will this change life on your street? With the economy teetering on the brink of a recession, it is time to act fast.

There are five key areas to take inventory of, including loans, housing, retirement, banking and career.

Mortgage and auto loans are going to be harder to get depending on your credit score. Credit card limits may be reduced and home equity lines of credit withdrawn. Be aware of this if you rely on credit for immediate monthly expenses.

Getting a mortgage is difficult. Rent prices have gone up due to more people renting instead of buying. Prepare room in your budget for rent increases into next year.

The stock market has taken a big hit due to the crisis. Don’t let this scare you, since your 401(k) and IRA accounts are for the long-term.You won’t need this money until you retire.

Still, be sure you are sensibly diversified according to your age amongst stocks, bonds and cash.

Several large banks, including Indy Mac and Washington Mutual, have sustained huge losses from bad mortgage debt. The main takeaway from this lesson is to make sure your money is FDIC (Federal Deposit Insurance Corporation) insured. You can check with your bank to see if they carry FDIC insurance, which is up to $100,000 per account.

In the midst of this economic panic, many companies are delaying or have put off hiring new employees altogether. If you have a job currently, go above and beyond to add extra value to your company. If you are looking for work, pare back on discretionary spending and limit yourself to the necessities. Get your resume in order and build up your network of contacts so you will be first in line when the dust settles.

Not All Gloom and Doom

There will be many reports of a gloom-and-doom type of scenario. Sure, the economy is going through a rough patch. However, we are nowhere near the lows of 1929. During the Great Depression, unemployment was 25 percent, whereas today it is around 6 percent.

Max Boot, a senior fellow at the Council on Foreign Relations, said it best in a recent opinion piece in the Los Angeles Times entitled, “Don't Sell America’s Economy Short.”

He referenced several crises in past years, including the oil-price spikes of the 1970s, the S&L debacle in the 1980s, and the bursting of the dot-com bubble in the early 2000s. He said, “These events and others caused many pundits to predict the United States would soon go the way of Rome.” The American economy is extremely resilient, and with some smart money management, we as individuals can come through this as well.  

Ryan Ortega is a freelance writer covering business and finance issues. He holds a designation in personal financial planning from UCLA and works in the financial industry.