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Upgrade using these steps https://powerofus.force.com/articles/Resource/Upgrade-to-NPSP3-from-a-Previous-Version-of-NPSP
The upgrade process is super easy, I was pleasantly surprised, but then you have to deal with your households. Go here https://powerofus.force.com/articles/Resource/NPSP-Convert-an-Existing-Account-Model-to-the-Household-Account-Model and if you are not freaked out by checking ALL those boxes before you start, then stop what you are doing and understand it first - this is a big deal.