Upgrade or New Purchase? HELP!

I currently have a "late 2006" version iMac (17", 1gb of RAM, 160gb HDD). I'm running Snow Leopard on this and have basically filled up the hard drive with music, photos, and videos to the point I had to move some to my external HDD, which was previously used strictly as a backup.

My current iMac is really dragging and when I went into the Apple Store, they indicated that I could upgrade my RAM, which may help, in addition to doing a complete reboot.

Given the size of my hard drive, I would also want to purchase another external hard drive to serve strictly as a backup.

My biggest question is whether or not going through all of this is worth it or would it be more beneficial to upgrade the whole system.

Any thoughts/advice/suggestions would be helpful.