firstly let me say that for such a small post count, you are doing very well to have a go at such a large amount of compile time to compile everything to get a working Linux onto an embedded device
maybe you could name the embedded device?
You might find, there are a heap of Linux distros already ported to that device?
Typically they have an ARM processor and depending on the version number and single core, dual or quad etc....you may find an image or 2 can be quickly downloaded and tested.
2) Puppy is quite well known to have multiple squashfiles at boot up
you may like to research that distro
I am not an expert in that area but typically they use "appending" squash file systems
let me explain
first squashfile as the basic stuff....but someone wants extra files so adds them and creates a second squashfile
puppy allows multiple squash files to be booted in one hit
you of course appear to be trying to do it all in one squashfile?
a quick google gives
image of how it works