Rules of Engagement Rings: How to Save on the Bridal Bling

When my girlfriend and I decided it was time to take our relationship to the next level, she wasn't sure what style engagement ring she wanted. First, she thought something with a vintage look, then shifted to looking for a more contemporary flair. It took us five months to settle on a suitable bauble.

Understandable, perhaps, that it took so much consideration: That piece of compacted carbon has some serious life-altering implications -- and financial ones. The average diamond engagement ring costs $3,500, according to Ken Gassman, founder of the Jewelry Industry Research Institute. Wedding website TheKnot.com puts that average figure closer to $5,000, but its calculation excludes sales from Walmart and other low-end retailers. But those prices don't appear to deter those in love.

Quite the contrary: We buy in droves. The U.S. diamond and diamond jewelry market grossed $25.3 billion in sales for 2010, the latest year with available data, and diamond engagement rings made up $7.7 billion of that figure. The total global diamond and diamond jewelry market reached $60.2 billion in 2010.

The Whoosh Effect

The ring I bought in August certainly was the single greatest purchase I had ever made. I could almost hear the whoosh of my bank account emptying as the jeweler swiped my credit card.

But arriving at that moment of transaction is not a simple process, what with the complex diamond rating criteria and unfamiliar jargon.

You find yourself weighing the "Four C's" -- cut, color, clarity, and carat -- and performing a balancing act among them to land on the best combination for your budget and tastes. That's how I ended up in the jewelry store, looking through a microscope for the first time since high school biology class. Then peering through a loupe. Then back to the microscope.

The Three-Month Rule

De Beers, long the dominant player in the diamond business, popularized the diamond engagement ring when it launched its "A Diamond Is Forever" campaign in 1947. But spending two (and later three) months' salary on an engagement ring -- as the company advocated 30 years ago -- is these days generally thought to be an outmoded idea.

"The three-month salary guideline is a myth," said Josh Holland, a spokesman for online jewelry retailer Blue Nile. "There are no real rules." Rather, Blue Nile advises men to set a budget they can comfortably afford and stick to it.

Based on 2010's average male salary of around $43,000, a $3,500 diamond ring is about one month's wages. Before the recession, the average price for an engagement ring was closer to $3,900, but dipped toward $3,200 in 2008. That rate has started floating back up, and U.S. jewelry sales overall have risen 11%.

Of course, there's some consolation for price-conscious men, Gassman says: The cost of a diamond has s sort of built-in limit. Since diamonds are a discretionary purchase, he explains, there's a "kink" in the diamond demand/price curve -- "the theoretical price above which diamond demand falls sharply, because consumers won't pay. It's sort of like gasoline above $4 in the U.S."

Even De Beers now emphasizes setting an appropriate budget for your diamond.

"Always choose a diamond based on beauty and that which excites your eyes, and not based on the 4Cs written on a grading report," said Jennie Farmer, communications director at De Beers Diamond Jewellers.

The Price of Diamonds

But why are these tiny stones so pricey?

"The economics of diamond mining would not work if they were not 'valuable,'" GIA's Russell Shor said. A major diamond mine costs about $1 billion to develop (including infrastructure and environmental safeguards) and over $100 million a year to operate and maintain -- let alone paying miners' wages. The rarity of the diamonds themselves drives up the price: Typically, one hundred tons of rock and ore may hold one carat's worth of diamond -- that's 5 million times as much dross as prize. And globally, some 800,000 people work cutting those rough diamonds into the faceted gems we covet.

Prices have also been kept high by the fact that no major new mines have been discovered in more than a decade, and no major new sources of supply are scheduled to come into production in the near-term, said Lynette Gould, head of media relations at De Beers Group. Meanwhile, demand for diamonds is increasing, "driven primarily by the expanding middle class in China and India and an increase in total private consumption levels in developed countries," she said.

By 2015, China, Hong Kong, Taiwan, India and the Persian Gulf states will account for some 40% of consumer demand -- equal to or greater than U.S. demand. A recent report from Bain Capital concluded that "demand for rough diamonds is set to outpace supply under all considered scenarios, indicating a strong positive outlook for the industry."

How to Save

So how do you combat these global factors, and prepare to enter into marriage without also entering into debt?

First, make sure you get what you pay for: To avoid getting ripped off, buy a gem with a certificate from a third-party rating system.

"What should really be a 'Fifth C' is certification," Blue Nile's Holland said. "Insist that the diamond have an independent grading report from either the GIA [Gemological Institute of America] or AGS [American Gem Society]. The quality of diamonds with these grading reports is considered guaranteed. Some jewelers have their own certification, but don't be fooled. This is like the fox guarding the hen house."

Next, understand the trade-off between size and quality. You can get a bigger stone at a given price: You just have to sacrafice on color, clarity or cut.

Color is thought to be the most forgiving quality.

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"The human eye tends to detect a diamond's sparkle first, and color second," Holland said. "Color in a diamond manifests itself as a pale yellow, but at a certain point, the unaided eye can't detect subtle color differences. For an excellent value, guys should select a 'near-colorless diamond [a grade of G-I], one with little or no noticeable color to the unaided eye."

Another money-saving trick that doesn't require much of a visually obvious compromise is to buy a stone just under landmark weights like half carat and full carat. A stone slightly lighter than those thresholds -- say, 0.95 carats instead of 1 carat -- can cost 20% less with no noticeable difference in appearance.

And you can also compromise on clarity -- a little bit. "Behind-the-counter jewelers will make a big deal about clarity; people feel like they have to have a flawless diamond, but they don't," Holland said. There's less need to be finicky about natural imperfections visible only under magnification.

"We recommend buying an 'eye-clean' diamond, one that has no imperfections visible to the unaided eye," Holland said. "This will save hundreds. After all, why pay for something you can't see? It's like paying someone to paint the bottom of your house."

One place not to skimp is on cut.

"An excellent cut stone can bring the fire and brilliance associated with a diamond even in medium to low quality stones," Shor said. "An excellently-cut stone will cost 10 to 20% more than an 'average' or poorly-cut one, but the additional life and beauty in the diamond is usually worth the premium."

In fact, a good sparkle can make the stone appear bigger. "Get the highest cut grade within your budget, Very Good or above if possible," Holland said.

Maintaining Perspective

My future wife selected a stone from the unique breed of fancy yellow diamonds -- which are graded in a separate category of their own. We designed the ring with an 18-karat yellow gold bezel and a platinum band.

Having done my research was a big help, but equally important was keeping in mind why I was buying it in the first place.

"The individual fire, life and brilliance of a diamond that excites each person is individual -- we often say that a diamond chooses you," De Beers's Farmer said. Buying something beautiful and meaningful is an investment in your commitment and the future of your relationship.