One of the biggest purchases you’ll make in your life is an engagement ring. With the average cost of engagement ring purchases standing at the price of three months’ salary, it’s not quite a car, but it’s a sizable expense.
This cost makes long-term, strategic planning about how you’re going to buy an engagement ring key. One way to save for engagement ring expenses over the long term is a certificate of deposit (CD).
We spoke to Gregory P. Alerte, CFP of Gregory and Company Comprehensive Wealth Management, LLC about the best way to use a CD to save up for an engagement ring.
What Is a Certificate of Deposit?
“Certificate of deposit accounts are basically debt obligation contracts between you and the bank,” Alerte said, further explaining that “you’re lending them money for a set amount of time. The money goes on their books and they loan it out to other people.”
The specific term of the loan, as well as your return on investment, varies from one bank to another. All banks, however, will tell you what you will receive if you allow the CD to reach maturity, which usually happens in terms of three months, six months, a year or two years.
Saving up for an Engagement Ring With a CD
If time is on your side, the longer you can save using a certificate of deposit, the better because the longer a term is on a CD, the higher certificate of deposit rates will generally be.
“The only way you’d really be able to use a CD to save for an engagement ring is if you were going to postpone your engagement for some time,” Alerte said. While you could get a CD with a term of three months and propose in the short term, “you wouldn’t get much of a return on the investment.”
Because the Federal Reserve announced it will keep interest rates low through 2015, a CD is only a useful saving tool if you’re willing to postpone your engagement plans or know that you’ll want to get engaged at a specific time in the future.
“If you’re a high school student who wants to propose to [your] high school sweetheart after college, a CD can make sense,” Alerte said. For this reason, Alerte isn’t convinced that a certificate of deposit is the best way to go about saving for engagement ring purchases — at least, not if you’re just about ready to pop the question.
“Unfortunately, in this environment, the return on CDs isn’t great,” Alerte said.
Opening Certificate of Deposit Accounts for an Engagement Ring
If you’re looking to deposit your savings into a certificate of deposit — for any reason — Alerte recommended that you play the field before making your final decision. Consumers should call up different banks, and even look into offerings from online banks, to compare rates offered and identify the best option in terms of a return.
In the 21st-century world of online banking, it’s never been easier to shop around for the best certificate of deposit rates. Once you get a CD, let the money mature. Otherwise, you’re not just losing out on interest, you’re going to pay big penalties on the principal, which will undermine your goal of saving up for an engagement ring.
If you want to save funds for an engagement ring in a separate account and want to obtain a higher yield for a shorter term, a money market account is likely your best bet to maintain liquidity over your assets and be able to purchase the ring when you’re ready on your terms, not those of the bank.
Photo credit: wwarby