Until I got engaged, I didn't realize how critical women could be about the ring. After I got engaged, the first thing all the women wanted to closely inspect was the ring...so if that is something she cares about, then you might want to save up a bit more to get a bigger stone. That being said, I have seen some really tacky rings that cost a ton of money.
I can understand the pressure to have a nice ring to showoff, but at the same time you need to put it into perspective, there are way more important things to spend your money on. Trust me, the whole wedding industry is there to take as much money as they can. Find her something that suits her personality.
My husband ended up getting the ring custom made, it cost about half of what it would have been in the store and he got sapphires in it. It makes it unique and I get compliments on it because it is different. That might be something to look into as well. There is a trend towards getting engagement rings with gemstones (like rubies/sapphires/etc) because of the crazy markups on diamonds. If she is open to it, diamonds are not the only option.
If you are getting a diamond, make sure to get a good cut (ideal). This will make the ring look bigger and more brilliant. If you are comparing two rings that are the same carat, the one with the better cut will look bigger because of the way light reflects through it. Check out this website, it explains it way better than I could (with graphs).
http://www.armstrongjewelers.com/Cut12.08.html
Good luck!