I have never seen the split you show for numbers 1 & 2.
This is my general advice regarding upgrading to Windows 10, regardless of whether upgrading from Windows 7 or Windows 8:
1. Take a full backup of all your data and a system image before you do anything else.
2. Use the Upgrade option, whether via the reserved copy process (GWX, where you have the small Windows 10 icon in your system tray and the reminder messages popping up) or via the "Upgrade Now" button on the Windows 10 Media Creation Tool webpage. I always keep the apps and files for this step.
3. See how your computer behaves after the upgrade process (if it succeeds, and it typically does). Some upgrades go perfectly smoothly and the machine is as good as it was or much better in terms of its behavior. In other cases, while the upgrade succeeds, you can experience some less than perfect behaviors afterward. This is not uncommon, particularly for upgrades from "well-used" Windows 7 systems that are laggy, sluggish, or otherwise behaving badly.
4. If you have "bad behavior," use the "Reset this PC" option under the Update & Security Settings, Recovery Pane. This forces the entire Windows 10 operating system to be reloaded from scratch. I generally use the "Keep my files" option first and only resort to letting it wipe everything if a "Keep my files" reset doesn't calm things down.
5. If all of the above does not work, they try burning install media, whether to optical media or bootable USB, using the Media Creation Tool page and doing a full install, from scratch, using that media.
I see no point in doing the "wipe everything and start from scratch" upgrade as the first choice because it's often not necessary. My technique is definitely more work if your system isn't happy after the upgrade keeping files and applications, but it's a lot of work to reinstall applications and your data files if you wipe them out as part of the upgrade.
There is no "right way," it's about what you're comfortable with and thinking clearly about what work is or might be necessary based upon the path you choose to take.