To use the upgrades, first craft one in a crafting table. If you carry the item in your inventory it'll automatically apply to the tool that's specified in the upgrade's name. Some effects like the Sharpness Sword Upgrade are stackable, so the more upgrades you have, the more effective the upgrade will be. Please note that there's a maximum amount of upgrades that'll cause the effect to be stronger, for example, you can only have 5 Sharpness Sword Upgrades. If you have more, it'll just give you Sharpness V.