What is the best (processor) upgrade for my iMac?

I would put my money into upgrading the memory up to the max here of 16GB and upgrade your storage. Your HD is likely holding you back given what you are working on. To make this baby sing you'll need to swap out your HD for a SSD, then place your HD in an external FireWire case to have externally. The only rub here is the HD has a thermal sensor which you'll need to substitute with the SSD swap out. You'll need to order the Apple Optical drive thermal sensor as its replacement Apple P/N: 922-9229.

Or, mount your SSD in this: 12.7 mm SATA Optical Bay SATA Hard Drive Enclosure and replace your optical drive with it. But then you give up the optical drive.

Here are the two IFIXIT Guides:

• Replacing the HD for a SSD - iMac Intel 21.5" EMC 2308 Hard Drive Replacement
• Dual Drive (SSD) - Installing iMac Intel 21.5" EMC 2308 Dual Hard Drive

Wow! You do have a very full drive!

Here's a free Log & cache cleaner from the Apps Store: iBoostUp. Give this a try first it should free up some space your system is starving for.

You really need to leave 1/4 to 1/3 of the disk free. Smaller drives need more space. Clean out as much as you can of junk you don't need any more.

As far as backing up your files:

TimeMachine does a good job! All you'll need here is an external drive, FireWire being the best you could also setup a NAS box which would be a good idea given the amount of stuff you have.

Even if you don't do anything more here you don't want to loose all of your work! Make that your 1st priority after cleaning out the junk.

Moving Forward:

Given your trade craft (music production). You should consider getting two drive systems here. One for working, and the other for backing up.

While you could use the same drive system (buying a pair of them) I would recommend a different slant here. Remember you want something fast while you are working but you don't need speed in the backup system. Lets look at what RAID drives are: RAID systems. Here we want a RAID 1 for its speed for your production drive and a non-RAID'ed drive for backup. Both of these drives would be external and ideally be FireWire 800 interfaced. Sadly, getting FireWire drives are getting harder ;-{

If you need to consider future proofing your self consider a NAS Drive while slower it is still faster than the USB interface your system has.

So far we've been talking about traditional HD's. As you clearly need to grow your storage as well as improve your systems performance.

As for the SSD don't go crazy with a large unit. While size is important the idea here is to leverage the speed of the SSD for the OS, Apps & scratch area your apps use. So look at your application & OS folders this is what will be on your SSD. Your Home folder stuff will be on the external drive. In most cases a 512GB SSD is more than big enough to service you.

OK getting back to whats needed to clean things up:

Once the backup is done get a USB thumb drive (16GB or larger) to create a backup boot disk. Using the OS installer off of the App store delete the current FAT32 format and then format the thumb drive with GUID & Mac OS Extended (Journaled). Use the OS installer to install the OS onto the thumb drive once done reboot your system holding the Option key and select the thumb drive as the boot drive. Launch Disk Utility to repair the permissions & disk.

This will make migration less painful when you install the new drive as well as move your data over to the new external drive setup.

I covered a lot here I hope it makes sense. Let us know if you have any more Q's and how it all ends up.

Good Luck!