More RAM would be good, going from 512MB to 1GB would make a noticeable improvement, 1GB >2GB less so. Adding memory is usually the most cost effective way of improving a computer's performance.
Drives lose some of their quoted capacity during formatting as it requires some space just to create the file system. An external drive is more flexible,with software like Acronis you can back up an entire image of your main drive to a single file and still use the drive for other backup and storage requirements. V11 of True Image is available, but v10 might be all you need click here