Many first-time parents do not realize the expenses associated with raising children and preparing for their future.

In addition to the diapers, car seats and strollers, there are expenses for day care, private school and college tuition -- and they can put a big dent in a family's budget.

The sooner, the better
If you're not swimming in money, no need to worry -- more important than how much you can afford to invest and save is how soon you can begin doing so. The earlier you begin, the less money you will have to save each month and the more interest you will earn.

About 73 percent of parents are currently saving for their children's college education, according to a study by the College Savings Plans Network, an association of state college savings programs. The problem is the amount and the investment vehicle used.

"Even though a high number of parents are actually saving, most are not saving enough or on a regular basis," says Marshall Bennett, chairman of CSPN. "Low-return passbook savings are the most used vehicle, but they have become the least effective choice for their money."

Savings accounts are a safe, sure way of saving money, but they earn less than the rate of inflation and earnings are taxed annually, based on the parents' income. And because of their easy access, they provide temptation for the saver. How soon do you need to start saving, and how much? See this chart: .

CDs safe but return is low
Certificates of deposit, another vehicle for short-term savings, may yield interest of 4 percent or 5 percent, but are still considered too conservative for parents with long-range goals. CDs usually offer a guaranteed rate of interest for a specific period, from one to five years. The issuing institution -- bank, credit union, or savings and loan -- allows you to choose the length of time that your money is on deposit. Typically, the longer the term, the higher the yield.

Be careful of penalties imposed for early withdrawals. Sometimes the penalties can be greater than the amount of interest earned, and you could lose a portion of the initial investment.

While a savings account may work well for immediate day care or private school needs, more profitable programs can prove to be invaluable for long-range plans, such as college. One long-term option is a trust fund, providing money for a child when the child becomes an adult. Trusts are usually set up by parents or relatives in the child's name, and reduce the estate of the giver.

Similar to a will, a trust is a legal document that holds property or assets for the beneficiary to receive at a designated time in the future. The money can be given in one lump sum or in intervals.

Trust funds can be established at banks, credit unions, and savings and loans, and some mutual funds also offer trust funds. Each issuer of a trust fund determines the amount required to open the account, as well as the interest rate and restrictions on withdrawals. Any interest, capital gains or dividends earned from a trust fund are taxed at the child's rate.

"When you set up a trust fund, you're teaching a child to invest money and watch it grow," says James D. Brown, a certified public accountant in Atlanta. "It's a great financial learning tool for the child, but not a great investment because of the low earnings potential."

Some states require you to file a trust document with them, so consult with an attorney specializing in estate planning before establishing a trust fund.

Saving with the state
If the money goes to the child, will the child use the money for education? To combat that concern, many parents are taking advantage of qualified state tuition programs, which allow them to start saving money for their child's college education in installments.

Sponsored and administered by state governments, the programs also allow parents to defer taxes on their investment income until the children enter college. Some drawbacks of this option include not having control over how the money is invested and not being able to move it to a different investment if you don't like the results. As with any investment or savings plan, shop around.

If you can afford to start saving money early and consistently, consider long-term investment programs such as education individual retirement accounts, mutual funds, or stocks and bonds, suggest financial experts. "You want to start with higher-risk investments that earn more," says Martin Nissenbaum, national director of personal income tax planning at Ernst & Young.

Education IRAs can be established by a parent or grandparent at any bank, credit union, and savings and loan to make after-tax contributions of as much as $500 annually for each child under age 18.

Distributions must be used for tuition, fees, room and board, books, supplies and equipment at a post-secondary institution. The interest earned on an Education IRA depends upon the rate offered by the financial institution, and it is not taxed if used for education costs. Compare rates carefully before investing in an IRA.

One drawback of an Education IRA is the $500 maximum contribution per year. According to the College Board, tuition is climbing at twice the rate of inflation, so a $500 annual contribution will not produce a sizable investment.

"It's almost an illusion," says Nissenbaum. " It really does not make much of a dent in the amount you need for college. It's a last-step measure."

Stocks risky, but returns better
Stocks and bonds are long-term investments for the aggressive investor. When you buy stocks, you acquire shares of a company's assets. If the company performs well, you may receive periodic dividends and later, you can sell the stock at a profit. If the company does not perform well and the stock price falls, you could lose some or all of the money you invested.

Bonds are considered to be a safer investment than stocks because bondholders are paid before stockholders if a company files for bankruptcy. The likelihood of a company defaulting on its bonds is rated by agencies such as Standard & Poors, and you can find those ratings at your local library.

A bond promises you that the issuing institution -- a corporation, state or federal government -- will repay you on a specified date at a fixed rate of interest. The terms range from a few months to 30 years and the rates vary. The value of a bond is subject to interest rate fluctuations. If interest rates rise after you buy your bond, you may have to sell it for less than its face value. There are no penalties for selling a bond before the end of the term.

"Parents are investing in long-term bonds and stocks for their kids, because stocks are averaging 8 to 10 percent over a long-term period," says Linda A. Barlow, a certified financial planner in Santa Ana, Calif. "That will beat the socks off a CD or a savings account."

Mutual funds are very popular investments and are professionally managed. A fund manager invests your money in a combination of stocks and bonds and money market accounts, and decides the best time to buy and sell. Because you are investing with a large group of investors, your risk of losing money is diluted.

There are several types of mutual funds with varying degrees of risk. Most mutual funds charge fees and you have to pay income tax on your profits.

Keep at it
The bottom line when it comes to saving is to begin early, invest consistently and try to put away enough money for college and beyond, says Nissenbaum. "You might want to prepare for their wedding, help set them up in a house or contribute toward their retirement."

There are several investment options and the best method of saving for your child's future depends upon how much time you have to save and how much risk you are willing to take. Look for investments that will outpace the cost of living, but be aware that not all investments will make money. The greater the expected rate of return, the greater the risk, and past success is no guarantee of future performance.

One final tip: don't put all your eggs in one basket. Diversify your investments, shop around to compare and invest wisely.

-- Posted: May 4, 1999