I suggest learning how to sound good while playing a Fender Squire, and all the while saving up money. Save up about a grand then buy a really nice guitar. It's better to just save a go up to high quality than improve, improve, improve upon the Squire. It will cost you more in the long run to make lots of improvements to a cheap guitar, than to start with a quality one.

It's kind of like a television. If you had never tried one, you might by a 10 inch black and white. You could then buy a screen to put on it to improve contrast, as well as an antennae... then you might go out and buy a 12 inch black and white. Later you want to get color, so you buy a 12 inch color, then you want bigger, so you get a 14 inch color... why not, when you decide that you like television, just take the patience to save up and buy a nice 60 inch plasma TV? It's cheaper than constantly upgrading and better than any improvement you can do to a regular TV. That was a pretty dumb analogy (I love analogies) but you get my point.