How to Save Up for the Perfect Engagement Ring with a Certificate of Deposit

Posted in CD Rates • March 2, 2013

certificate of deposit - saving for engagement ringOne 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 makes long-term, strategic planning about how you’re going to buy an engagement ring key. One way to plan for saving for engagement ring expenses in 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 when you’re planning to get engaged.

What Is a Certificate of Deposit?

Certificate of deposit accounts are basically debt obligation contracts between you and the bank,” says Alerte, 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. However, all banks 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.

Alternatives to Certificate of Deposit Accounts

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. “If you’re a high school student who wants to propose to his high school sweetheart after college, a CD can make sense,” Alerte says. However, if you’re looking to propose within a shorter time frame, it’s much better to go with a money market account, which is more flexible and offers a comparable return on investment.

“Unfortunately, in this environment, the return on CDs isn’t great,” expresses Alerte.

Saving for Engagement Ring Plans with a CD

If time is on your hands, the longer you can save using certificate of deposit accounts, the better. This is because the longer a term is on a CD, the larger certificate of deposit rates will likely 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,” says Alerte. 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.” This is why he recommends the money market as an alternative.

Longer-term CDs have higher interest rates for a very simple reason. “The longer the term, the more of a chance there is that interest rates will go up,” Alerte explains. For example, if you buy a CD at a return of one percent and interest rates go up to 2 percent, you’re only getting half the return that you would have if you waited. This can be a significant difference depending on how much rates fluctuate and how much you have invested in the CD.

However, because the Fed has announced it will keep interest rates low through 2015, the chance of that happening is slim-to-none for the next few years.

Opening Certificate of Deposit Accounts for an Engagement Ring

If you’re looking to deposit into certificate of deposit accounts — for any reason — Alerte recommends that you play the field before making your final decision. Consumers should call up different banks, including searching through online banks, to find out what their CD rates are and identify the best options 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 goes against your goal of saving for engagement ring shopping.

(Image courtesy of wwarby via Flickr)

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