Sinking funds when calculating Net Worth

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

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.

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.