Make sure your Skylanders are out taking part in Adventures whenever possible. You'll need to create an Adventure Balloon for each Skylander you want to send out on an Adventure. Or completing goals from the quest log or clearing out randomly occurring camps and invasions will also give you a decent chunk of cash!
Experience and leveling up
When you see little castle icons that occasionally pop from your buildings tap them and you'll be rewarded with experience points which level you up. Also completing goals and clearing space on your island will also reward you with XP.
To level up a Skylander earn Hero Points and you can view each Skylander's progress on their info bar. Hero Points can be earned from sending a Skylander on an Adventure for example.