Insulating old house walls

[bpatton]

Okay, so this is a long post but I'm looking for some advice in a project I have coming up in the near future. I have an old farmhouse built in the early 1940s that I'm slowly bringing back to life. Its a weekend type house that gets visited about once a month year round. The house currently has NO insulation anywhere. Its like a clean slate! The attic is completely void of insulation as are the walls and the floor (its pier and beam with a vented crawl space). The siding is horizontal lap siding but covered with an "Insulshake" paper asphalt siding that is probably 60 years old. The Insulshake is falling off in large chunks because the asphalt is giving it up finally. Also the building has wood windows that are rotten. So my thoughts are removing and replacing the windows and horizontal siding and replacing all to stabilize the house and bring up the efficiency. This is a budget conscious project but the replacement windows will definitely be double plane Low E. Now, my original idea was to remove the Insulshake and the horizontal lap siding and install fiberglass batts in the walls then install sheathing, board insulation, and a new siding.
The thought did come to mind that instead of removing the horizontal lap siding (because its in good condition) to remove the Insulshake and replace with 2.5in of XPS foam then sizing on top of that. That might cut out quite a bit of time because time is always limited with these projects.
Now this house is in a very dry climate so I'm not too worried about the lack of vapour barrier internally.
Any thoughts? I may be totally wrong here but I thought I would give it a shot.
Thanks for reading!