Like most forms of saving, the earlier you start the better - particularly if you're hoping to send your child to a private school and university. There are two reasons for starting to save early. First, you will receive the benefit of compounded returns on your savings (you earn interest on interest) and second, you can afford to take a longer-term view and can invest in "growth" assets - such as shares - instead of putting your money into a bank account. Because penalty tax rates apply to children's "unearned" income (that's money they didn't work for), most people prefer to save in their own name and earmark the money for the child's education. If you or your partner is on a lower tax rate, put the savings in that person's name, rather than incurring tax at the top marginal rate. Financial advisers often recommend managed funds as good vehicles to save for a child's education as you can choose an investment strategy that suits you and the money will be professionally managed.

What if I don't have the minimum investment for a managed fund?

All the usual savings guidelines apply. It could make sense to build up your savings in a high-interest bank account until you have sufficient funds to invest in a higher earning product. Check out the bonus saver-style accounts that pay an extra 3 per cent interest (annualised) if you pay into your account every month.

I don't want to incur tax on the earnings. Is there another way to do it?

I'm assuming that you still want to avoid paying tax on the child's money, which can be up to 66 per cent. An alternative option is to invest in a product where the tax is paid for you, or is deferred until the product matures.

The tax treatment on insurance and friendly society bonds bought before July 1, 2001, will not be affected by the new tax system. This means that the insurance company or friendly society will pay tax on the earnings each year and, after 10 years, the earnings will be "tax free" (really tax-paid) in your hands.

Life companies now pay tax at 39 per cent and friendlies at 33 per cent, so these can be quite tax-effective options for those paying a higher marginal tax rate. Both tax rates are scheduled to fall to 30 per cent when cuts are made to the company tax rate.

Special education plans are another option. These are simply life insurance endowment policies and receive a similar tax treatment to insurance bonds. Most are structured to mature when a child reaches a certain age, such as 18, rather than having a 10-year life.

The Australian Scholarship Group was set up to help families save for education and offers a tertiary savings program as well as secondary schooling benefits. It says that its funds will lose their tax-exempt status under the tax reform but, as with bonds, it will pass on tax credits that investors can use to reduce their tax bills.

ASG encourages parents to join its funds as soon as possible after the birth of their child (you have to join before your child reaches the age of seven), and pays the child a scholarship allowance - or bursary - during its schooling years. The child pays tax on this received income and can use the tax credits to offset his or her tax bill.

Contributions start at $20.81 a week (indexed) and, if the fund earns just 3.5 per cent, ASG says a child in the tertiary program, who was enrolled before his first birthday, would receive $19,713 of benefits, $28,351 of returned contributions, and $7,689 of tax credits during his university years.

The same child enrolled in the secondary program contributing $20 a week would receive $23,605 over six years of schooling, plus tax credits of $2,710.

Products such as endowment warrants can also defer tax payments until your child is older. Endowment warrants are like buying shares on lay-by. You pay part of the cost now, and dividends go towards making your final payment - generally targeted to be in about 10 years' time.