Usually in these sorts of games it makes more sense to save up and then buy higher level equipment. In this one though, you want to have un-mastered equipment as much as possible so you can earn the most experience. That means that you should only upgrade when you master an item, and then only upgrade to the next most powerful item.
First time playing beat it on Generation 2. I don't understand the XP either and I don't think I ever made it past the 3'rd or 4'th upgrade in anything. Killed about half an hour on it and enjoyed myself. The game served it's purpose.
So it's fairly easy to beat the game after the first few generations, which is kinda odd, cause you are nowhere fully upgraded. I would say it's more fun of a game when they increased the difficulty level of the boss, making it only possible to beat him with at least some of the best equipment.