As college costs increase, it can be intimidating to find ways to save up for your child's education. Many parents know that they need to start saving money early, but they might not know where to start or how to start. Children are not cheap. One of the most expensive parts of raising a child is the college education.

Increasing College Costs

Although inflation in the United States has stayed relatively low, the inflation rate for college has more than doubled. Inflation for college costs averages between 3 and 7 percent each year, depending on the type of college or university.

The estimated four-year total (including tuition, room, and board) for a public university will be close to $85,000 by the year 2011, according to www.collegeboard.com. By 2016, the website estimates, the cost will be close to $115,000. The cost for a private education will be even higher.

What Parents Must Understand

There are two key things that parents must understand when saving for college educations.

1. Inform your children that paying for college is a joint responsibility. You should tell them early on how much you are able to contribute, and how much they should be prepared to contribute for their educations.

Although it would be wonderful if they can find a college that costs less or equal to what you are able to contribute, your children should be aware that they may need to take out scholarships and loans to fund the rest of their education. Your children should be prepared to take summer jobs and look for grants.

2. Get started early. Let compounding interest work for you by building principle early and let the interest accumulate. You should continue to contribute to the savings if possible, but starting early will give you a good head start.

Funding Your Student's Education

Don't expect to be able to rely on scholarships and grants to pay for your children's educational loans. You will need to save some money to help pay for your child's college education or consolidate with consolidation loans.

As you begin the process of saving for college, you need to first decide what kinds of accounts you would like to use for saving the money. There are various options available to parents and relatives.

Uniform Gift to Minors account: This account puts the savings in your child's name. You, the parent, have no ownership rights to the account but will control the account until your child comes of age. This means that you will control the account until your child usually turns either 18 or 21, depending on your state.

Coverdell Education Savings Account (CSEA): Parents who qualify for this account - those families with gross income below $190,000 - are allowed to contribute up to $2,000 per child per year. The contribution isn't tax deductible but the earnings are tax deferred.

State-Sponsored Prepaid tuition Plan: These plans promise that your investment in the plan will cover tuition at any public school in your state. It will not matter what the tuition is for the school when your child enrolls; the price is locked in when you make your investment.

State-Sponsored College Savings Plans: Individual states have these plans, but do not require the parent or student to be a resident of the state or attend college in the state. You can find more information about the 529 plans at www.collegesavings.org

Traditional Methods: You can save for your child's education in a variety of accounts. These accounts can include basic savings accounts, investment opportunities, and annuities.

The level of personal savings has dropped to a concerning degree, even though it is understood that it is vital to save to be able to guarantee future comfort and security. You should teach yourself how to stay on track with your monthly expenses using a budget that will also allow you to build up surplus cash as a savings buffer.

Before you begin!

* Talk to members of your family in order to ascertain cost saving strategies and ways that you can work together to achieve this.

* Work out the amount you were able to save the previous year. How much of your income did you set aside for the future?

* Plan to use any windfalls you may obtain this year (eg a bonus or tax refund) to reduce debt and chase financial goals.

Put savings first with a budget

Where does the money disappear to? Many people in America are finding it increasingly difficult to manage their spending. Personal savings rates have fallen in recent years and continue to stay low by historical standards as many people continue to spend more than they can afford.

Now might be considered an ideal time to formulate a budget, particularly if you are one of those Americans who just cannot save. A good budget will help you to track where all of your money goes and will hopefully allow you to put some aside for the really important goals such as college or retirement.

Getting started.

Setting up a good budget means some effort, but any benefits you reap will more than offset the time and effort invested. The design or structure of the budget is up to you. Perhaps you will decide on using financial planning software (eg Microsoft Money or Quicken) or you may prefer the old trusty "pen and paper" style.

The primary aspect of any budget is income, that is, how much money you receive each month. In this you may consider your salary or wage, legal settlements, fees, and dividends from investments. When you have worked out your monthly income your budget will help you to ensure that you are not spending more than what is coming in. This in turn will assist you in ridding yourself of debt and increasing your savings.

After this is worked out, you will need to investigate how your money is spent. You can begin this process by keeping a record of your spending for a month, collecting bills and receipts. Don't neglect all the "little" expenses such as visits to the corner store for drinks and newspapers.

Compile a list of all your expenses, placing them into categories. Suggested categories are "fixed committed expenses" (payments on things such as the mortgage, other loans and insurance that do not change from month to month); "other committed expenses" (necessities such as food, clothing and utilities) and "discretionary expenses" (things you would like but aren't essential).

Less spending = more savings

When you are familiar with your spending patterns you will be able to analyze the expenses. The "fixed" expenses are most probably likely to remain the same unless you plan to move or sell the car. If these are greater than your monthly income, though, you won't be able to save as you have too high a debt burden.

You may be able to reduce your spending in the "other committed expenses" category, but it would be best to think of ways to reduce spending in the "discretionary" category first as this is generally easier to achieve. Reduce the number of meals that you eat out or visit less expensive restaurants and cancel magazine subscriptions that you no longer read. Create your own entertainment: it is possible to rent two DVDs for the same amount as one adult movie ticket. If you purchase some microwave popcorn, you will have a cheap night's entertainment at home.

Digging deeper

When you have decreased the amount you are spending on "discretionary" items, take another look at the "other committed" items. Is it possible to create more economical meals? Can you buy in bulk and store it? Use public transport?

You should take a very close look at credit card debt. If this is high, you must investigate ways to reduce it. You may be able to negotiate a reduction in interest rates with the company or search for one with a lower rate. Take care that you do not fall into the trap of low introductory rates that soar sky high after six months.

Another consideration is a home equity loan or a consolidation loan. The former may offer a tax incentive. Check that you will be able to meet the payments - if you miss a payment on a home equity loan, the bank is able to foreclose within 90 days.

If after all this effort you find that you are unable to save because of the debt load you are carrying or if the monthly payments and necessary bills are becoming increasingly more difficult to meet, you probably need some help. A nonprofit group known as National Federation for Credit Counseling (call 1-800-388-2227, or visit nfcc.org) can assist you in establishing a budget and negotiating payment schedules with lenders for a small fee. When you are able to pay off the credit cards, that money can be transformed into savings.

The goal: more savings

When you have worked out the areas in which you can economize, you will be able to create an "expected" column in your budget. Any savings and commitments to your children's educational expenses should be in the "fixed committed expenses" column. The reason for this is that it will encourage you to pay yourself first, which is a great way to learn how to save. By resisting the temptation to spend this, you are building towards your goals. Some banks or credit unions have payroll savings plans or a Chase reward card that offers credit card rewards and other things that can help you to save more. It is also advisable to investigate any employer-sponsored retirement plans at your workplace. These can offer tax benefits as well as saving for the future.