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The $5000 in my Vacation sinking fund is obviously an asset which should be accounted for.

But what about the $12000 target for my vacation? As soon as I save that much, I'm going to spend it, meaning my net worth would instantly and seemingly inexplicably drop.

Thus, should have a $5000 "Vacation" pseudo-liability which exactly offsets the sinking fund as it grows, so that I know where the money has gone? What about just setting the pseudo-liability to $12000?

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Financial reports only make sense in light of the purpose of the report.

If you’re preparing a report for income tax purposes, you’d include your income but probably not your undeductible expenses.

If you’re trying to work out how much your possessions are worth, you’d probably include the ‘mad money’ stash and perhaps even the carpets and drapes in your home.

If you’re trying to figure out how much you have for daily expenses, you might exclude the holiday and contingency funds because their fluctuations pre- and post-holiday etc are big distractions from what you’re really trying to calculate.

But if you come up short and think, “Maybe I should defer that holiday I’m saving for”, then you might add the $5k back in.

So it’s horses for courses. Since you’re generating the report for yourself, not for anyone else, you get to choose.

Having said that, ‘net worth’ calculations are typically point-in-time numbers. Will your financial net worth drop immediately after spending $12k on a holiday? Yes. But you will only see the drop in the numbers if you include the cash you had when you had it and exclude it when you’ve spent it.

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my net worth would instantly and seemingly inexplicably drop.

This is as it should be. Future spending that you intend, but have not obligated yourself to, is not a liability. If you faced a financial emergency, you could and would use the money to maintain liquidity rather than still spend it on a vacation.

Your net worth does drop when you spend the money on an activity that has no financial payoff. This arguably involves a compensating gain in an intangible "mental health" account (the enjoyment of the vacation), but net worth doesn't count that.

The moment you make a nonrefundable $12k vacation booking, that is when you are making the decision to give up $12k. This should show up as a significant moment in your finances. If you can't take the hit, don't spend it.

"...your self-worth is not determined by your net-worth" --Suze Orman

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  • "Future spending that you intend, but have not obligated yourself to, is not a liability." That is strictly true in GAAP, but does "personal accounting" need to be held to that standard? I should be able to say, "this is what I plan on doing with the money. If plans change, then plans change." After all money is fungible.
    – RonJohn
    Jul 30, 2021 at 13:52
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    @RonJohn To me, net worth should measure your financial capability. As long as you still have the option not to spend the money on a vacation, it is available for other things if needed. Once you spend it, it suddenly isn't. This helps give due gravity to the point where the irrevocable spending decision is made.
    – nanoman
    Jul 30, 2021 at 19:17
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Your net worth does not inexplicably drop. You will have a corresponding £12,000 expense recognising that you have purchased the holiday. This expense shows you where the money has gone. You have effectively swapped some of your net worth for a holiday. That seems fair.

As others have said, there is no liability until you agree to buy the holiday. Only at that point does your net worth fall. When you agree to buy the holiday, then you get a liability reducing your net worth and an expense showing that you've bought a holiday. When you pay for the holiday (which can be at the same time as you agree to buy it) your cash asset decreases by $12k, as does the liability to pay for the holiday.

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  • But a net worth report doesn't care about expenses.
    – RonJohn
    Jul 30, 2021 at 18:48
  • @RonJohn Exactly. Net worth reports (balance sheets) alone cannot explain changes in total net worth such as a sudden drop of $12k. You desire to track that you intend to spend $12k on a holiday but that does not belong on a balance sheet (because that intention is neither an asset nor a liability). Tracking that intention requires an additional record outside of a balance sheet (maybe a budget). Explaining the change between two balance sheets requires an income statement.
    – Steve Kidd
    Jul 30, 2021 at 20:26

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