Upgrade advisor at
Windows 7 Upgrade Advisor - Download - Microsoft Windows will tell you whether your computer is suitable. You can see a tutorial at
Upgrading from Windows XP to Windows 7 - Help & How-to - Microsoft Windows. You need to do a clean install, so you need your software discs etc. and use something like Windows Easy Transfer to move the data.
If you're tight on cash, I'd stick with XP. But you can upgrade direct to Win 8 for $40, which is probably cheaper than going to Win 7. Again, the upgrade wouldn't preserve your software, but you could move your data.
Win 8 requires a DEP-compliant motherboard/BIOS (Data Execution Prevention). It's probably easy to check if your model has that.