I'd say buy a new system bundled with a Kinect and try selling your old one. The Kinect makes using the system so much better, especially with voice recognition. If you don't already have one, that's the best option.
Buying a bigger HDD would be more cost efficient, but it's also more painstaking. The licensed hard drives are stupidly expensive, despite being mere laptop drives in a plastic shell. You'd have to buy a