Save for Taxes vs Net worth

My husband sometimes gets income from freelance jobs. In Holland it is normal that you keep track of your freelance incomes in one year and the next year you pay what you owe (around june 2018 for income in 2017!!)

Since we have a progressive taxes system and every year the income varies it's hard to predict how many of our income we have to set aside. So we always take in account the highest percentage and after doing the taxes, most of the times we have ourselves some holiday money left.

I've been working with Ynab voor almost 2 years now, and the one thing that annoys me is that the money set aside on my ' tax saving categorie'  counts in my net worth.

For example:

We have 10.000 euro Freelance income in 2017 spread over different months > Everything goes to: ' to be budgeted'
I assign a total of 4.000 euro to the category ' tax saving'
I assign a total of 6.000 euro to my spending categories

In 2018 I do my taxes, and we only have to pay 3000 euro in taxes. Then, I pay this from my tax saving categorie. And the 1000 euro left I assign to another spending categorie (holiday) So I make an -1000 adjustment on the column ' budgeted' in the categorie tax saving.

First question: Am I doing it right/ most optimal??

Second question: It annoys me that my net worth for a really long time (From the day we earn the money, till the day we have to pay our taxes, several months later) is 3000/4000 euro higher then it's ment to be. The 3000/4000 euro seem to me as a provisional debt. Does anyone have an idea how I can correct it? The hard part is that the exact amount of   'debt' (If you can call it that) is not known the moment you get your money.

So not a life changing question, but I'm really curious if someone can help me with this. It will help me sleep better :)

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• First Question: It's how I do it - I also have the issue where I need to make an estimate of taxes I will owe so put money into a category as I am paid to save for the future taxes. When the tax is calculated, I pay the bill and move any remaining money to another category to enjoy!

Second Question: This one is a little more tricky! Net Worth should be the difference between current assets and current liabilities. Since the tax is a liability, in theory it shouldn't be in the calculation. The problem is that YNAB has no way of knowing that money in a category is for a future (or current) liability or you're just saving for a holiday.

One way to overcome the problem is to create a "Tracking" account in YNAB using "Other Liability" type. You can record the tax liability here. Tracking accounts don't impact the budget and don't have a category so you will still need to set aside the tax money in a category but the Net Worth report will take out any liabilities in your Tax tracking account.

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• Hi Marisss !

I believe Mike Taylor covered everything in his post, but I'm going to move this over to the Small Business section just in case anyone else wants to chime in! :)

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• Thank you for this advice! I just set up an "other liability" tracking account for my estimated taxes, and while it kinda hurts to look at, I think it's going to be very useful in getting an accurate picture of our finances.

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• To question #1, it looks like you are handling it correctly.

To question #2:

I suggest the simpler route. Your question is about net worth and goes well beyond taxes, and could be applied to so many things that could make your YNAB experience more complicated.

Let it be. Don't let the net worth amount bother you. The entire point of using YNAB is to have money ready to go when it's time to use it. Taxes are just another (future) expense. Your bank balance goes up when you're saving and goes down when you're spending. So does your net worth.

The sooner you make that leap, the less complicated your financial life will be.

Unless you are tracking all of your assets in YNAB, net worth will never be accurate anyway.

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