The mere thought of that jolly old Christmas -- in these days of inflation and budget cuts -- can be enough to make a parent cry. All too many of us don't know which part of the household budget to cut in order to buy the cards and the turkey, much less find the wherewithal to fill the stockings.

Take heart. There ARE ways to beat Christmas costs, and to make the holiday memorable.

First: Take a good hard look around the house, in all your children's closets, in every toybox and shelf, and don't forget the space behind the stairs. After taking inventory, ask yourself how many of your children's presently-owned toys are really played with and enjoyed regularly. How many are simply taking up space and are either broken, seldom used, unappreciated and cost far too much to begin with?

The answers are revealing. Most of us buy gifts for our children on impulse or base our purchases on our children's TV-conditioned/want-quotient. Let's face it: Neither way is the right way to go about it.

Step two: Sit down and list what each child most likes to do, both inside and out. The activities a child chooses for himself are often those he finds most enjoyable or relaxing. This year, make an effort to tailor the contents of Santa's bag to your child's real interests and abilities. Here are some inflation-proof suggestions for helping the old elf without taking out a second mortgage:

1. For the boy 3 to 5 years old, apt to be taken with small metal cars. For about $15, you or your husband can make a marvelous road set. Select pine or spruce boards 6 inches wide and 1/2 inch thick. Cut pieces in 2-foot lengths, making dove-tail joints on the ends. Strips of molding applied to the upper surface of each piece provide an edge so that the cars do not fall off. If you are extra handy, make a crossroads section as well, so that the straight sections can go in four directions. This home-hade highway will provide hours of enjoyment.

2. A make-it box, which contains all the makings of your child's inventions. Provide several kinds of tape, a ball of string, scissors, glue, rubber bands, a small stapler and a box of staples (make sure your child is old enough to use a stapler safely), paper of various sizes, scraps of fabric, and a box of crayons or markers. Especially welcome are rolls of adding machine paper.

3. For the child who enjoys working with wood. Put leftovers, purchased for a small price from cabinetmakers or hardware stores, in a large plastic tub and provide nails and a small hammer. Roofing nails have broad heads and are good for beginners.

4. For those long -- and confining -- winter afternoons coming up soon. Hardly anything is more soothing to a child than clay, and the homemade variety has at least two advantages over store-bought: cost, and it's easier to clean up. Clay in four colors, boxed in plastic cartons with lids is a delightful gift for young children. A recipe which lasts for a long time:

1 cup flour

1/2 cup salt

2 tsp. cream of tartar

1 cup water

1 Tbs. vegetable oil

Make one batch per color. Mix flour, salt, cream of tartar together. (Food coloring is better absorbed and more evenly distributed if added to the water before mixing with dry ingredients.) Slowly add water and oil. Cook over medium heat until thick. Cool. Knead 5 minutes. Box.

5. The always-appreciated gift of paper and paints or markers. Some printers sell end cuts of high quality paper by the pound, and end rolls from newspaper plants can sometimes be purchased for little money.

6. For an older child, a set of dry tempera paints for a bedroom wall mural. Non-toxic white glue can be added to the paint for durability. For the child who really wants to do it right, include graph paper for him to prepare a sketch to be transferred to the wall.

7. For 4- and 5-year-olds, a set of hand-made stencil designs accompanied by crayons or markers.

8. Puppets, which can be made in a variety of ways. The easiest are from socks and fabric scraps or felt pieces. Or provide a box of puppet makings: a package of brown lunch bags, fabric and felt scraps, crayons or markers and non-toxic glue.

9. A mini-garden -- small clay pots filled with prepared soil, packets of seeds, and a small set of printed directions. By mid-February, a child can have a garden spot on her bedroom window sill.

10. For little girls enamored of doll houses and miniatures. Tiny items made with bread dough -- expensive ready-made -- can be designed at home with books available at craft shops. Precise instructions are given for making all sorts of items for doll houses. Also available are books describing how to make fabric-covered cardboard furniture. Other easily made doll house items include rugs made from colored burlap, tables from sewing spools, bedspreads and curtains made from calico pieces (also good for wallpaper) and pictures made from magazine cutouts glued to small pieces of wood.

Our older son's favorite gift of all time was building material for his own fort. We provided 2-by-4s, plywood, nails and a good hammer. By the time he had finished his third renovation, this gift had provided enjoyment for over 2 1/2 years. With the price of lumber today, you may wish to consider alternatives such as packing crates. Not to be overlooked are bargain bins at lumber and hardware stores which often contain damaged doors, shutters, and paneling.

Christmas -- if you put your imagination to work -- doesn't have to be a budget-breaker, and children will be far happier with parents who aren't losing sleep over paying the bills.