12/20/2012 05:53 pm ET Updated Feb 19, 2013

Should You Even Try to Save for College?

Yes, yes, you know you're supposed to be saving for your child's college education. You also know you're supposed to read to your kids, serve healthy snacks, eat five fruits and vegetables, drink eight 8-ounce glasses of water, exercise for 60 minutes, and floss daily. Seriously: who does all this?

Well, when it comes to saving for college, the reality is that you might not even be in a financial position to set aside any money for college tuition yet. I interviewed Stephen Elias, the vice president of Planet Tuition -- a college funding advisory group in Massachusetts -- and he laid out the urgent priorities that families must address before they're ready to begin trying to save a single dollar for college.

According to Elias, the first financial consideration for every family with minor children must be to purchase life and disability insurance on both parents. College Savings Plans do not fund themselves; if a parent is disabled or passes away, then obviously the child's college account would never be funded. So, protect your family first.

Next, you must fund your own "rainy day" emergency account with at least six months of income. Elias recommends continuing to fund this account until you reach about $45,500, since this is the amount of cash the average family is allowed to have before the Financial Aid Formula adjusts your college pricing upward. Save this amount before anything else.

Then, you must maximize your retirement savings. You will surely stop working someday, whereas your child might not attend college. Also, you can borrow money to pay for college, but you can't borrow to pay for your retirement. Plus, the Financial Aid Formula does not consider retirement savings when calculating your college costs.

The reality is, most families don't save nearly enough for retirement. The Boston College Center for Retirement Research reports that the average Baby Boomer has an average of just $42,000 in their 401(k) and IRA accounts, combined. Increasing this amount has to take precedence over college savings, Elias insists. Also, there are ways to use your retirement accounts to pay for college without incurring the normal penalties for early withdrawal.

Think you're ready to start saving for college now? Not quite. There are still a few other financial items to take care of, first. Elias reports that he is seeing more parents of high school seniors who still have student loans of their own to repay. He strongly advises paying these off, and paying off all credit card debts, next. Because home equity is not considered in the financial aid calculation at most schools, he recommends paying your mortgage down as much as possible before funding a college savings account.

Okay, if you've made it this far, congratulations. You are in a very small minority. The best way to begin saving for college remains the 529 account, but you must be careful of how much you save in these accounts. Why? Well, 529s tend to be low risk with low returns, for one thing. Even more concerning: if the money you save in a 529 is not spent on college, then you will face a 10 percent penalty in addition to ordinary income tax on the earnings when you withdraw your money for other purposes. Therefore, you don't want to overfund these accounts. You have to guess how much money you might need, without knowing what school your child might attend or how much your tuition might be (because almost everyone's price is different, due to financial aid), and then undershoot that amount. If your child ends up skipping college, you can wind up with a tax penalty on your college savings. What's more, the 529 is counted in the financial aid calculation as a parent asset, which means that if you have a lot of money in this account, colleges can raise the price they charge your family.

If this all sounds overwhelming and complicated, it is. Sorry. The main takeaway, however, is to focus where you are. According to Elias, "The families who are most successful in preparing for college expenses dedicate their resources to building a sound financial foundation before they save the first dollar for college." If you haven't accomplished the earlier savings priorities, such as setting aside a rainy day fund or funding your retirement account, then stop beating yourself up over your lack of college savings. You're not there, yet. The reality is that the financial aid formula includes a disincentive to save for college, so attend to your more pressing family financial needs first.