How to upgrade and avoid bottlenecking

Technology is changing so fast that I would not do a piecemeal upgrade. You won't save any money, but may end up spending more if the part you were expecting to find was discontinued and you had to change ram or the cpu due to a board or other item no longer being available. Lots of parts get discontinued within a year and you're forced to search ebay for a replacement. So, if you can, I strongly recommend you save more until you can change the cpu/board/ram at the same time, which may also require a new power supply if you also change the video card. Eventually, that has to figure into your budget also.

Agreed with o1die.

The core (Processor, Motherboard, RAM) should always be upgraded as one "unit".

If you are wanting 1 piece every month then save up 3 months and get a new core unit first.

Then go for a new PSU. If you want 1 video card (suggested) then you should be fine with an XFX 450w or if its a really high end video card then an XFX 550w.

Then get whatever new video card you want. Since this will be like half a year in the future, I would look closely at the new ATI 7000 series cards, maybe a 7800 series card since that is a good mix of price and performance usually are.

I am not a fan of the case. Sometime in the next year you might want to upgrade to a more modern case with a bottom mount PSU and perforated holes on the bottom and stuff like that. My PC-K59 is a good example.

Windows 7 is going to be necessary as well if you want to go higher than 4 GBs of RAM (I would recommend 8 GBs).

Raiddinn told you how to upgrade. Don't have much to add.

If you are going put 8 GB of RAM in the system, to use it, you will need a 64 bit OS.

You cannot avoid bottlenecks. Some part will always be the slowest.