The Planner's Perspective: The Economics of an Engagement
By Paul Morrone CFP®, CPA, MSA
For the majority of America, buying a Kim Kardashian sized ring probably isn’t reality and most will quickly learn that money doesn’t go too far when you’re looking at diamonds. There really is no ‘right’ amount to spend on a ring, as long as it is something you can afford (I’m not sure who said two months’ salary was the magic number, but that seems to be an arbitrary benchmark). Whether the cost of the ring you ultimately decide on is equivalent to that of a bicycle or a BMW, the most important thing to remember is that it’s who you’re giving it to that matters most, not the price tag of the ring itself.
As with any major purchase, settling a budget is key to making an educated decision when you’re shopping and making sure that your expectations are kept in check throughout the process. The cost of the diamond is just the first step, and it’s a bit disheartening to see a bunch of tiny stones sitting on a black cloth, knowing that each of them costs several thousand dollars, if not more. Being upfront about your budget with the jeweler can prevent your eyes from getting bigger than your wallet, as a good jeweler will show you stones within your budget. The stone, of course, needs to get set which is also a cost and varies based upon your selection of the setting and the intricacies of the band itself. If debt is unavoidable, floating a balance on a credit card for years is not the most cost-effective way to purchase your dream ring. Prior to purchasing the ring, you should have already saved up ample funds to buy it, and any debt incurred should be manageable with a low or zero percent rate in order to make a sound financial decision. You don’t want to have hundreds of dollars a month in debt service, as planning a wedding includes quite a lot of costs involved that will add up quickly over the subsequent months.
But what happens once you purchase the ring? Do you simply put it in your household safe? Give it to a parent, relative or friend for safekeeping, or do what I did and get it out of your possession and onto your (hopefully) soon-to-be fiancé’s finger as soon as possible? Regardless of what your plan is, the first step is to insure it. Yes, back to basics before your big moment. With your ring purchase you will likely receive an appraisal and certification for your stone. Your insurance agent will need a copy of the appraisal and/or a receipt to add the ring to your existing homeowner’s policy as a scheduled item. If you do not have a homeowner’s policy, you can purchase a separate policy specifically for the ring itself. Either way, expect the cost of insurance to be somewhere from 1%-2% of the ring’s insured value per year.
Properly insuring the ring for its full value is a best practice, however, it’s important to read the fine print to ensure that no matter what happens to your ring that you are protected. Common riders include clauses to protect against everything from theft to fire, but most importantly for ‘mysterious disappearance’ which is really a catch-all for any other event that may have caused a ring to vanish. In the event of a claim, you’ll want to understand how your policy will compensate you. Is there a deductible? How will compensation be paid (will they provide a new ring or issue a check)? Is proof of loss required? Are there any instances of loss that would cause your claim to be denied? Is your ring a unique or vintage piece that cannot be easily replicated?
Finally, for the estate and tax nerds that are reading this, you may be wondering if you need to file a gift tax return if your ring is valued at more than $14,000 (the 2017 per-person gift tax exclusion amount, increased to $15,000 for 2018). Of course, the answer here is no, and that is because an engagement ring is deemed to be a ‘conditional gift.’ Only completed gifts can trigger gift tax. The gift is completed once you are legally married, and as such, the gift would then qualify for the unlimited marital gift exemption between spouses. So fear not big spenders, shoot for the stars!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.