Get educated on saving, or your children may not last the course

School, university, weddings... Melanie Bien shows how to invest for your family's future

Government plans to introduce top-up fees to be paid after graduation are causing plenty of controversy. And while Tony Blair stakes his career on the outcome, parents with children approaching university age will feel there is a lot at stake financially, given the escalating costs of higher education.

Funding undergraduates requires serious planning and saving if they are to last the course. With Barclays Bank forecasting that graduates leaving university in 2006 will owe at least £17,000, any finan-cial help will ease the pain.

As with any investment, the earlier you start, the better, and the time scale available to you will dictate what sort of investments you opt for.

"It is all down to risk," says Rupert Hodson, director of Saving for Children, an independent website launched last week to offer tips and advice on investing for kids. "How you view risk will dictate where you invest. If you are putting money away for the short term, you need low-risk investments such as premium bonds, savings accounts and mini cash individual savings accounts (ISAs). These aren't going to lose you any money but they aren't going to make a great deal, either."

Those parents with time on their side have more options. "If you have longer to invest, you can take on higher risk via investment and unit trusts or equity ISAs," adds Mr Hodson. "This should generate higher returns but there is also a risk that you could lose money."

Before investing any cash, it's worth thinking about the various points in their lives when your children might require your financial input, and calculating roughly what sort of sums you will need. The Saving for Children website estimates how much each milestone is likely to cost you - from school fees to university or even your children getting married.

Once you've established the parameters you are working within, you can choose a suitable investment vehicle. If there's just a couple of years to go until your child will need the cash, equities are not an option because they are high risk and the money isn't easily accessible.

A far better option is a savings account or mini cash ISA - where returns are tax-free - paying the highest rate of interest you can find. Many of these don't charge penalties for instant access, which is even handier. Intelligent Finance pays 4.35 per cent interest on its mini cash ISA, while the best deal on savings is ING Direct's 4.3 per cent annual equivalent rate (AER).

Although a number of children's savings accounts are available, many of which can run up until the age of 18, these tend not to pay the best rates of interest. Some offer free gifts as an incentive, but try not to be swayed by these.

"Steer well clear of any account or fund offering a free teddy bear," warns Mr Hodson. "There are some very good savings accounts designed for kids, such as that offered by the Royal Bank of Scotland, but not all of them are worthwhile."

If you have five years or more until the cash is needed, equities are a much better option than savings accounts. But rather than opting for individual shares, you can reduce risk by choosing a managed equity fund, where your cash is spread among dozens of companies. Once you've built up your investment in one fund, you should aim to diversify your money across several funds to reduce risk even further.

"Investing in a unit or investment trust can be fairly simple and cost effective, but once you have done so, you should monitor your holdings on a regular basis. Don't just forget about them for the next 15 years," warns Justin Modray at independent financial adviser Bestinvest.

To grow the returns free of tax, you could invest in a stocks and shares ISA. Children cannot open one of these plans until they are 18 (16 for a mini cash account), so the downside is you will have to use up your own ISA allowance. Each adult can invest up to £7,000 each tax year (6 April to 5 April) in a maxi stocks and shares ISA.

If you do have several years to invest and opt for shares, remember to start shifting your cash back into "safer" investments, such as savings accounts and cash ISAs, as you near the time when your child will need the money.