Mark Hedlund, the founder of shuttered personal finance Web app Wesabe, has written a fantastic post-mortem on his experience entitled “Why Wesabe Lost to Mint.” It offers tremendously candid insight into what they did wrong at Wesabe, what Mint did right, and the surprisingly persistent myths around failures and successes in both camps.

This is a story that is of course full of valuable lessons for entrepreneurs and anyone trying to create a product in a competitive marketplace. What’s even more interesting for me is that the last chapter has hardly been written in this category of software. This is not a case where Wesabe lost and Mint took the market, lock, stock and barrel. There’s still tremendous opportunity in personal finance software, mostly because, in its current state ca. 2010, most of these applications don’t fulfill their true purpose.

This is a point that’s very fresh in my mind. Having recently left a job with a healthy salary to hobble together income from multiple smaller sources while raising a young family, personal finance software has, unsurprisingly, become much, much more critical to me, and its failures much, much more evident.

Time and Money

For a good decade or so I was a Quicken for Mac user, and then a few years back I started using a desktop program called IGG Software’s iBank. They were both fine tools for helping me to balance my accounts, but they provided very little to really help me change my financial picture. This is true for most financial software: we’re still just getting out of the gate with it, living through a surprisingly lengthy first generation of ideas — or maybe slowly starting to emerge into a second generation. But we still have a long way to go.

Moving the functionality of Quicken to the Web is progress, and adding social tagging and features and automated categorization are steps forward too. These are things that the Wesabes and Mints of the world have done well.

On the whole though, most of the personal finance applications I’ve come across are still not particularly imaginative or insightful tools, including Mint. I liken the category to digital calendaring. Using Outlook/Exchange or Google Calendar is a significant upgrade from a paper desk calendar, but it really hasn’t changed the way we approach the management of our time, and it certainly doesn’t result in us having more time. No one would say digital calendaring has solved that problem.

To fulfill its real mission, personal finance software should result in users having more money. I’m not saying if you use these applications you should expect to get rich, but the real purpose of this category of software is to let you do more with what you already have — in effect, to budget your finances. Most applications, in my experience, offer rudimentary tools for this, at best. They focus a disappointingly large amount of their efforts on creating pie charts and bar graphs, which like a lot of information graphics are really about giving you the impression that you’re understanding data without giving you any actual useful insight into that data.

What we really need are tools that give you much more insight into what you’ve spent, as well as truly helpful guidance into what you should be spending. In nearly two decades of using this software, I never got that from any application. It’s tricky and complicated to really provide good advice along these lines, of course, but it should be possible. Aside perhaps from your email client, few categories of software receive as much input of detailed, critical personal data as a personal finance program does. All of this data is structured and completely available for sophisticated number crunching and robust processing. And yet the output from these applications is almost uniformly paltry. What you get in return for all of that data entry is basically a digital version of your checkbook register.

Past Performance Is Not an Indicator of Future Performance

It’s not all bad news. There are some applications that have realized this and are moving in the right direction by helping users take a more proactive approach to their finances.

Jesse Mecham’s awkwardly but aptly monikered You Need a Budget, in particular, is a promising example of a package that actually takes a position on what you should be spending, something that other programs are remarkably averse to doing. Its approach is very simple and powerful: only spend this month what you made last month. That’s exactly the kind of approach that I crave: don’t just give me an expensive checkbook balancing tool, give me a method for changing my habits. Unfortunately, YNAB runs only on the Adobe Air platform, which is a major disincentive for many. It also seems to lack a certain elegance in its user experience, another criticism that has dogged personal finance software for as long as I can remember.

My family is in our second month of giving No Thirst Software’s MoneyWell a try. It’s an elegant Mac desktop program that, in concert with a very nicely designed iPhone app, has allowed us to capture and understand more of our day-to-day spending than ever before. Unfortunately, I’m not sure it’s giving us everything we need in terms of creating a comprehensive spending plan — its budgeting tools are decent and promising, but they seem like a work in progress. Without more sophisticated budgeting features, I’m not convinced we’ll end up any richer than before we began using it.

The next generation of personal finance apps, I hope, will truly expand on budgeting, combining the breakthroughs in social media that Mint and Wesabe pioneered with a practical understanding of how people actually use their money. There’s a real opportunity for innovation and reshaping the market here. In fact, if they get this right, someone could make a lot of money at it.