Q: My son asked me today, "You and mom have a savings account for our college, right?" I'm disappointed in myself that we have less than $1,000 in each of our three kids' savings accounts. I know we will up our monthly contribution, but should I invest it in a mutual account to maximize any opportunity to grow their savings? My kids are 15, 12, and 10.

Joe

A: Don't feel bad. It's hard to save. Here are a couple of points to consider as you set aside more money for their college educations. First, kids grow up fast, really fast. (I know. I'm still reeling.) One key to saving for college is realizing that you'll want to draw on the money within a relatively short period of time, especially with your 15-year-old. This insight should inform how much risk you'll take with the money.

There's nothing inherently wrong with putting some money into equity mutual funds. (I'm assuming you're contemplating equities for maximizing growth.) But, as with any investment with a specific goal and time frame, you should factor in the downside risk. What if you put money into the stock market and, say, freshman year or junior year stocks plunge into a bear market? How would the decline in value affect your ability to pay your share of the college bill? "You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn," wrote the late Peter Bernstein, a leading philosopher of risk.

I would consider putting some money into a 529 college savings plan, which offers a number of advantages. For one thing, savings in the 529 is segregated from the rest of the household budget. A 529 is funded with after-tax dollars, but the money grows tax-deferred from both federal and state taxes. When you withdraw the accumulated savings for qualified expenses the money is free of federal taxes and, in Minnesota, state taxes. Qualified educational expenses include tuition, mandatory fees, books, supplies and equipment. The 529 savings can be spent at any accredited public and private college. The federal financial aid formula treats 529 plans favorably. Private colleges can consider any asset in their financial aid calculations, although most follow the federal guidelines.

A major attraction of a 529 is that anyone can contribute to the plan, including parents, grandparents, uncles, aunts, cousins and friends. The minimum to open a plan is low. For example, it's only $25 for Minnesota's state-sponsored 529 ($15 if it's through payroll deduction). You have a number of investment options with a 529, ranging from conservative to aggressive. Minnesota's plan offers 11 investment options. Two good resources for researching 529s are finaid.org and savingforcollege.com.

That said, I would also put some savings into taxable accounts, everything from a federally insured savings account to mutual funds. Your most flexible money is in your taxable accounts and if it turns out you don't need the savings for college expenses you can tap it for other purposes.

I'm sure you're doing this, but sometimes in dealing with the personal finances of saving for college we forget the most important investment is making sure your children get a good college preparatory education. There are a number of ways to finance college. But the better prepared students are, the more choice they'll have when it comes to picking a college.

Chris Farrell is economics editor for "Marketplace Money." His e-mail is cfarrell@mpr.org.