Best approach is to hire an architect or a designer, someone you are comfortable working with, and develop a plan that can be phased in over a few years. The fee for an architect / designer would pay for itself many times over by saving you from mistakes and aborted work. The architect / designer can help you crystallize what you want for the big picture and how each decision you make along the way is consistent with that big picture. Paying for this service by the hour will let you control how much you spend on design and will make sure you're really comfortable with the person before you've spent big money on them.

I also tell people that it's useful for them to live in a house for a little time before embarking on the work. You'll get to know what the house wants to be, how you'll use different spaces, what works and doesn't work, how sun light comes into the house through the course of a day and seasonally. My sense is never to rush it but to go slow and steady with a plan in hand.

I was just going to say the same thing! Good advice.

Bud is right - but here's another way to get a start on it:
Remove everything that isn't staying.

Even if you don't paint the walls, replace the draperies or recarpet immediately - peeling off wallpaper, removing dated window treatments and nasty old carpets & linoleum goes a long way to opening up the space.
Who cares if you have to live on concrete subfloors or don't have window coverings for a year or so? It's not as bad as you think and allows you to see your space in a fresh new way, without the constraints of the past.

I love the idea of a decorator but am not sure my super-budget conscious husband would agree. Can someone give me a ballpark of what an initial plan might cost? Hundreds of $$? Thousands?

And bepsf - thanks so much. that's a great idea. Not sure we can live on concrete with 2 little boys, but we can definitely work on window treatments and wallpaper.

My sense is you can have some initial discussions and a preliminary plan put together for a few hundred dollars - certainly less than a thousand. My personal preference is that you first engage an architect to address spatial issues - but I'm an architect so what can I say!

And tell your husband that spending a few dollars up front to put together a plan will save you guys thousands of dollars later. All too often I see folks spending thousands, if not tens of thousands, of dollars redoing work or worse not liking what they did because they didn't do the planning up front.

Thanks so much! I really appreciate the ideas and quick responses.

If an architect or designer is not cost effecient, I would recommend the following plan. First, figure your budget what you can afford verses how you will be buying materials and paying for labor. (ie. Such as are you financing materials and paying cash for labor or cash on demand for everything.
Then start with the rooms where you spend the most amount of time if you are not performing structural renovations. (ie Kitchen, Master Bedroom/Bath, Great room etc)
From there begin collecting photo's of what you like and want to see the space look like. Items such as cabinets, flooring, lighting, plumbing, tile, paint and surfaces as they will make the most impact. You will need input from a general contractor as to how all trades will work together so you can devise a project management plan and derive time line of the selection process to installation.
Then start pricing out the materials and labor and see where bid's fall verses your budget and that will be a BIG determination prior to start of project as to where you should begin! Hope this is helpful.

I would start with removing the wall paper and painting the house in a light colour - to brighten things up and make it fresh. This can easily be a DIY project, and even if it's not a perfect paint job it will let you live in the space for a while without being depressed by what you are seeing on the wall. If your budget is really tight for paint, you can also go to home depot etc and get their "Boo Boo" paint: paints that people didn't like when mixed and are now sold at a much lower price. Paint the space and then you will have a blank canvas to be able to think and visualize. I agree with all the previous posters advice too.