Should I insulate the interior or exterior?

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I'm closing on a house and plan on doing some renovating. Very excited about finally being a homeowner! The house was built in 1940 and most likely has mud and lathe behind the horrid wood paneling.
My plan is to hang drywall and I'm presented with two options: 1) make a mess, rip out the mud/lathe, and throw in some insulation OR 2) insulate from the exterior when I side over that aged asphalt siding. I don't feel like having an empty wallet when my heating bill comes around this winter.

Any other things I should do while I have the walls open?

Any advice is welcome!
 
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I have remodeled over 10 houses. Lathe and plaster can be a huge mess and lots of work. But once you get it all removed you can run new wiring, insulate correctly, and have nice, new drywall to paint. The end result is great! I even used plastic weather boxes around my outlet electrical boxes on exterior walls for less cold air leakage. I just realized this is a year old. Hope you have got things how you want,
 

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