Update 2: I found the root cause of the issues I've been having, and reported it properly here: http://community.spotify.com/t5/Help-Desktop-Linux-Mac-and/Bug-Report-Your-Music-doesn-t-sync-correc...
Update: I have dug further and found primarly one specific bug (#1 below) that's behind most of the issues with Your Music. So here's a new a revised request list of issues/fixes:
To get technical about #1: There seems to be two internal lists that make up Your Music, one for songs, and one for albums. The Artists section is derived from the albums list, as saving an Album always adds the artist too. The idea would be that these two lists are always kept in sync when a song/album is added to your library, but this currently fails. Hence adding an album doesn't always add it's songs to the Songs section, and adding a song rarely adds it's album and artist to the Albums and Artists sections.
In my testing, saving in album adds all songs from the album to Songs about 90% of the time. While adding a song adds the album and artist to the Albums and Artists sections about 2% of time when clicking on the + button next to songs. If you drag-n-drop the song(s) onto the Songs section, it never updates the Albums/Artists sections.
Fixing the above bullet points will in my opinion solve 95% of the issues with Your Music. As it ensures Your Music is a singular storage of your actual music, including songs/albums from local files that Spotify aren't aware of.
Personally I had until now simply created playlists from albums and playlist folders to try to build a "Library".
I'm not fully sure what the new Your Music feature is trying to acheive. It feels like a bit of a split brain feature not knowing what it's trying to acheive as it's very functionality is inconsistent and confusing. And has also butchered the Starring feature in the process.
Here's my theories on the potential things it was originally intended to do, and why it fails at each of them. Which one is closest to the actually original intended purposes is anyone's guess it seems.
Funcioning as completely separate "favorite" lists for Songs, Albums, and Artists. Meaning adding a song to the Songs list, does not add it to the Albums list. Adding an album to the Albums list, does not add it's songs to the Songs list. Nor does the Artists list effect the Albums or Songs lists, or vise-versa.
Why it fails:
Functioning as a Library/Collection feature, similar to how you'd have a set of locally stored songs in iTunes or other music players, effectively this collection is ALL "Your Music", and the Songs, Albums, and Artists lists should effectively be different views of that collection. This means that the Songs list is the definitive list of what goes into your collection, and the Albums and Artists lists are just an alternative view of all your songs.
Why it fails:
An attempt at replacing the Starred songs feature/playlist.
Why it fails:
Current State of The Starred Playlist:
Horrible. To use one word. Replacing the starring feature on each song with the + symbol to add it to Your Music makes the Starred playlist horrible. You can't tell if the song is already starred or not, so you'll probably add it to the Starred playlist again, creating a duplicate entry. Which leads me onto missing features like "Show Duplicates" for example.
My Suggested Solution:
Not vital to fixing the mess that is Your Music, but a few other things I'd darn love to see in Spotify.
Overall Spotify is a great service. But it's various apps and interfaces does leave things to be desired. And a few things seriously worry me, like the removal of the Album Cover feature. Acknowledgements of people wantings album/artist browsers withing playlists in the Ideas forum, but years later no sign of such features.
This latest "feature" of Your Music just makes me worry even more. It doesn't function in a consistent or expected way and overall feels like a **bleep**ty alpha/beta product with lots of bugs, and it almost kills the Starring feature. It makes me almost want to go back to just using iTunes and finding some decent way to sync my music to my Android phone.
And additionally, it makes seriously think about if I should put some research into the technical possibility of building my own Spotify desktop app that works the way I want it to. That would obviously depend on API availability (official/unofficial doesn't matter, as long as it works). If for nothing else, it might at least get Spotify's attention and take some of the ideas on board.
Update: I've submitted a summery of my suggestions as an idea in the Idea forum/section as it might get more attention there: http://community.spotify.com/t5/Spotify-Ideas/Fix-the-Your-Music-catastrophe/idi-p/739291