Hi - I am looking to buy a Mac Mini M1 as an upgrade to my 2012 Mac Mini.

I mainly use Adobe Creative Suite with very occasional Final Cut work.

My current setup is as follows which I feel is a mess:

240GB SSD (OSX + Apps) - In Use: 230GB
2TB Internal Hard Drive (Partitioned for Work Files (800GB) & Personal Files (400GB) - In Use 1.2TB
2TB External HardDrive (Lightroom Catalogue) - In Use: 900GB

Backups:
3 TB External Hard Drive (Time Machine) - In Use: 3TB
4 TB External Hard Drive (Extra Backup for Work, Personal & Lightroom) - In use: 2TB

I am confused as the best way to work this with the M1 and I am somewhat naive as to my options. If I had all my files on an internal drive I would need 2.5TB which isn't possible.

The most cost effective option appears to be 256GB option and external hard drives but is there a cleaner way than all the ones I have connected now? The vast majority of my files are images, videos and .psd files which I seldom need to access but which I do need to keep copies of.

I've always found a small main/internal drive to be recipe for frustration. Given that your needs are 2.5TB, I would suggest a few things:

1. Try to purge as many extra files from your disk using a program like Disk Inventory X. The visual representation of your files makes it a lot easier to find what's taking up space.
2. Go with a 1TB drive on your new Mac Mini. At the very least go 512gb. Don't partition it; use folders. Trust me, you'll use your drive's space more efficiently!
3. Continue using your external drives for their original purpose, OR, grab a 10TB external (I've seen them as low as $200 recently) and consolidate your files there, keeping only your Time Machine drive.

Time Machine is a very handy local backup, but I don't like to trust local-only backups. Something like Backblaze or Crashplan that's stored remotely will help you in the case that a power surge fries your machine + everything connected, house fire, theft, etc.

I guess I fail to see the issue... I wouldn't necessarily want all my files on the internal drive, even if there were enough storage space to accommodate them.

You also have the option of using a NAS for your assets and move them locally as necessary when you work on them, but this is a major additional expense.

Keep doin' what you're doin'...

How I think I'd re-arrange things:

Get the m1 with a 512gb internal SSD.
This leaves you plenty of room for "future growth".

When you get the new Mini, you can "migrate" the contents of your boot/apps SSD to the Mini's internal drive.

I would then use the SSD as a "cloned backup" of the internal boot drive.

With that out of the way...

Take the 2tb HDD OUT OF the 2012 Mini, and put it into an external enclosure like this: Plug this into the new Mini, and let it exist pretty much as it did before.
The only difference will be that it's now an external drive.

Do the same with the Lightroom catalogue drive -- it's fine as it is now.

Let your backups continue to exist, pretty much as they are now.

I don't consider this to be "a mess".
Rather, it's a quite logical way to keep a lot of data under control.
I like the idea of keeping the boot drive/apps/basic account "separated" from everything else, particularly data.
I also like the idea of keeping "work" and "personal" data separated in their own partitions.

What I think you could change for the better:
For backing up both of the 2tb drives (work/personal and lightroom), I would suggest that you DO NOT USE time machine.
Instead, use a cloning app such as CarbonCopyCloner or SuperDuper.
Either of these will create and maintain EXACT COPIES of the source drive onto the target drive, and the two drives will be almost indistinguishable from one another.

If you try this just once, you'll see why this is a superior way of doing it.