If the Windows 7 install is placed on a different partition to the qualifying OS installation a multi-boot menu will be created and both installations will still be (in practical terms) usable.Many people mistakenly believe that after you use an upgrade disk/key your previous 'qualifying' install somehow gets deactivated and its install key rendered unusable. It's an inexpensive and good quality commercial third party product. My personal imaging product of preference, for personal usage, is Acronis True Image Home Edition. That's bye the bye, and not really relevent to your dilemma, of course. You rendered your license to use it void when you used it as a qualifying product for the license upgrade.
There's no mechanism which enables monitoring of your activity and detection of you using that previous install afterwards, but you're not (in a legal sense) allowed to use it afterwards anyway. That has NOT been the case for any previous version Windows Upgrade, and I see no reason whatsoever to suspect that it'll be the case this time either. A 'qualifying' installation must be present on the drive first, of course.
An Upgrade disk/key can be used to install Windows 7 to a different partition, using the 'custom' install option. Store your system drive image away safely and, in the event of a future reinstall or drive failure, you'll only need to boot from your Windows 7 disk, use its recovery environment facilites, and restore your backup system image!
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All Windows 7 versions include 'Windows Complete PC Backup and Restore'. When you eventually have Windows 7 installed, configured to your liking, and all confirmed working well, make another drive image of that installation. If things go belly-up (as the initial install of a new OS version often does) then you can restore that image and start over again. First, make a precautionary image of your system drive before you proceed. It would be better to use a drive imaging tool. It is possible to install Windows 7 to a different partition and leave the XP install untouched, but this approach does not protect you against the event of a hard drive failure. if I need to re-install Windows 7 at some point, and I dont have the original CD or the recovery files, what can I do? Is it possible for me to leave the XP installation as is, and install 7 on a different partition, as this would solve the issue if I need to re-install?
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