Insulate with cellulose. Blow it into the wall cavities and into the attic. Then caulk every crack around every window. Do not try and caulk the horizontal joints in clapboard siding, just the vertical joints.
Fiberglass (particularly blown in) is a very bad idea in the exterior walls of older houses. There is no vapor barrier, and in a cold climate frost can form inside the insulation. When it melts it causes a lot of problems. Cellulose insulation is hydrophilic and freely absorbs moisture without forming frost, and then releases it without forming liquid.
No mater what you do, older houses are going to leak more than tightly built newer houses.

I may be missing something, but I have heard just the opposite of what Brickeye is saying. In this part of the country (Minnesota) cellulose has a very bad rap in houses with no, or minimal vapor barriers. When cellulose gets wet, it settles and tries to go back to its original material, paper products. I have seen cellulose insulation in attics that was blown in at 10" thick settle to only 3" in a matter of a few years, taking away most of the insulating value. Walls will do equally bad, with 1/2 or more of cavity unfilled after a few years. Most folks around here seem to have fiberglass blown into walls at higher pressure to compress it a bit to combat settling, but the best wall insulation would be to have it foamed. If your old house has the interior painted with multiple coats of oil base enamel, it probably has a pretty good vapor barrier, except for air leakage.

The problems really start to show up when enough insulation is added to move the frost line into the insulation. Fiberglass is hydrophobic and a disaster without vapor barrier protection. When water vapor penetrates into fiberglass it forms frost on the surface of the fibers. When the temperature increases the frost melts and wets the insulation. It mats down very badly and looses almost all insulation value until the moisture manages to escape. The moisture is very damaging to wood structures and promotes rot (and mold and mildew). Wait a few years and look at the fiberglass and see how much loft it has after it gets wet a few times.
Settling may decrease the insulation value of cellulose, but at least it is not damaging to the structure the way liquid water is inside walls. Cellulose is hydrophilic and holds and releases moisture as vapor only (adsorption).
I have torn into enough walls in both New Hampshire and Virginia to avoid fiberglass if a vapor barrier is not present. The NH problems where a lot worse since the winter temperatures are significantly lower, but even in VA I have ripped into many walls with nice black moldy fiberglass. Older cellulose (>10-12 years) seems to have had a larger particle size compared to the newer stuff and has generally settled a few inches, but the only moldy messes have been where water entered the cavity from gutter and flashing problems. I have been into walls that have 10 year old blown cellulose and have seen installations that have settling of less than ¼-inch in an 8 foot tall cavity. I have a sub that does wet applied cellulose, but the cavities must be completely open.

Did a little bit of research on this, as it seemed to not line up with most of what I have heard over the years. I learned a couple of interesting things, the biggest being that there have been several studies done recently that are saying that there is no need for a vapor barrier on the inside wall, and that it can actually be a detriment. The studies showed that even two coats of standard latex were enough to reduce vapor transimission enough that there would not be a problem with any type of insulation, (celluloes, fiberglass, or foam). Latex or oil "vapor barrier paint" was even better. The problem the vapor barriers created were during cooling season when the moisture would condense on the vapor barrier inside the wall do to air conditioning and high humidity conditions. With no vapor barrier, they saw less problems. At least one of the tests was done in the cold of Canada, and they do seem to be better with their testing there. I found that to be very interesting information, and would explain why my old house with no vapor barrier showed no problems or any signs of water or condensation in the walls when I tore into them, even though they we well insulated with mineral wool batts.

Here in Minnesota, we have been having repeated problems with newer houses having severe water damage and mold problems. For a long time the contractors and builders were blaming too high indoor humidity and in-wall condensation. To combat the problem, they started to not put any water proofing (Tyvek or tar paper) on the outsides of the walls, so the walls could "breathe" and dry themselves. Surprise, surprise, the problems have gotten worse in most cases. The real problems aren't coming from inside the house, it appears, but from exterior leaks caused by bad flashing, siding, electrical and plumbing openings. The reason the buildings were getting wet in the first place, even with exterior waterproofing, was that it was improperly done, and allowing water into the walls. The siding/flashing would leak, it would get wet behind the Tyvek or tar paper, and rot out the house very quickly. When they quit using the water proofing materials, the walls would dry out quicker, but they also got wetter in the first place. Inspectors are now finally getting on the builders about doing PROPER water barrier installation on the outside of the walls,and I would bet most of the problems will go away.

Under the above conditions of leakage, I would expect fiberglass to perform a bit better than cellulose, but no insulation will stand up to it long, nor will the structure of the building.

If you have older wiring, like the knob and tube type, you will want to think twice about putting any insulation in the walls.

Saving energy ... what a concept.
I test homes with a blower door to measure air infiltration into the home, ductwork to measure
duct loss.
What amazes homeowners is the amount of air entering
the home, from places that your would never imagine.
Usually these areas can be sealed with minimal cost,
it is just to find where the air infiltration sites are.
In many homes, once testing is done and air infiltration
sitea are sealed, utility costs are greatly reduced,
and comfort in home is increased.
Call your local utility company and see if they can test
your home.

We have a 1905 home we've been in about 7 years.

New windows are very good.

Take silicon and caulk all the cracks you can find. A walk around the house on a cold, windy winter day will let you know where. Around windows and baseboards I found the worst offenders.

There are insulation pads you put behind the plate of light and electric outlets on exterior walls. You can get them at any hardware store cheap. I also put the child-proof socket plugs in electric sockets on outside walls wher e no plugs are plugged in.

We insulated between the cellar ceiling and the first floor, and attic, there was no insulation.

Check your basement for air leaks also. We found many there that we patched up.

I also put strip insulation around all the door frames. As the house settles over decades not everything moves in the same direction.

When we had the old ( original ) windows. I used rope caulk on them every winter. That cut the heat bill almost in half.

Here is a link that might be useful: (home page)

I also live in an old house from 1871. Caulk, caulk and more caulk is a must with such houses. I went all the way around my skirting boards where they join the hardwood floors with clear caulk. The difference is noticable and that hovering coldness around the floors has vanished. I also caulked around the light fixtures as a lot of heat can vanish through the tiny gaps around them due to it's tendency to rise. While we're talking about heat rising, it's a very good idea to weatherstrip your attic door as a lot of heat rises out through there.

Another option for saving some cash is energy saving lightbulbs. I've recently replaced most my bulbs with them in an attempt to curb the electric bills, so far they seem to be working nicely.

Yes! we do sooo much caulking too! We also use those insulated little pads for the electric plug boxes. I laughed at my husband when he bought those thinking that we couldn't lose THAT much heat through the electric boxes...but after doing some reading he was right! I couldn't believe it.

We also buy all the energy saving lightbulbs. It is nice that they last for a long time and we dont' have to change them all the time.

So many people that I know think that heating an old house is a huge amount of money but I can tell you after comparing our heating bill to friends that have brand new houses in our area we realized that our heat costs are LESS than new houses. I am not sure if they are less because of our efforts to make our old house more efficiant or because newly built houses are built poorly in our area. Just one more reason that makes me feel happy and proud to have an old house!
-renee

New web site information

Here is a link that might be useful: Energy Saving ideas

Particularly if you have a heritage home and would like radiant heating, the ideal source would be a masonry heater  hands down!
By using this method of radiant heating, windows, caulking etc., are of a lesser concern. Why? Because it heats people and things  not air!

Visit: http://www.how-efficient-is-it-magazine.com/masonryheater.html

S.R.

Here is a link that might be useful: http://www.how-efficient-is-it-magazine.com/masonryheater.html