RAM is an important factor whether you have a 400Mhz computer or a 1.3 Ghz computer, the amount of RAM you have in your system determines how much data could be "fetched" from the fast paced RAM instead of looking for the next instruction in your harddrive which is many times slower.
You may think that too much RAM would make your computer extremely fast and there is no limit on how much you could put. That's where people go wrong. When the computer needs to look for constant data in RAM, addressing space comes into play. For example if you are looking for someone's house in a small street, you have a better chance of finding the right house on the small street than on the big street. The big street is what you'd get if you overload your computer with RAM.
What does overloading mean? Well as the example I have stated above, it would take you longer to find the proper directions and the right house if you were walking in a big city, where there are many addresses, while on a residential area if you know the street, you could find the house faster. This is what happens when you overload it takes the computer longer to find the right address of the data.
Everything in RAM has a memory location, and your CPU fetches the data from a memory location, so if there are many to search through, it will hinder your performance. But also having too few address (too little RAM) would be like taking the longest way possible to find the data, in other words it would have to access your harddrive to find the information.
Since most users use Win9x/ME, this version of windows which is for home computers, have a limit on how much RAM could be effictively used. I have on my machine 192Mb of ram, while other people have upwards of that, since as I mentioned before that prices are very cheap.
How much is too much? If you don't run too many applications at the same time you could use 64Mb of RAM, but it will be kind of slow, since Windows and the applications will be using most of it. 128Mb is fine for most desktop users, who listen to mp3s while surfing the net and like chatting since these are not very memory intensive programs, assuming that you aren't using Windows Media Player 7 which is uses a lot of memory for its visual effects. Even my computer slows down for a few seconds when loading the program. If you are into highly intensive games, I would suggest that you should run a minimum of 256mb, these games put a high strain on your computer and 256mb should be enough that the game doesn't have to access your harddrive too often, which slows down the game.
Windows 9x/ME as I stated before were built for home use, not for highly intensive programs. There is a limit on what is enough ram on the win9x core OSes (win95,win98,winME) and that is 512Mb. There have been a lot of benchmarks out there with comptuers that have 512Mb and more and the results show that computer performance suffers since there is so much RAM that it takes the CPU longer to find the data. Unlike Win9x/ME, Windows NT and Windows 2000 were designed for use in servers where there would be a lot of strain and massive amounts of dataflow. WinNT/2k can handle effieciently upwards of 512Mb of Ram. If you are a WinNT/2k user than you won't have a performance decrease if you use 512Mb.
WinNT/2k could handle more than 1Gb of ram effieciently, since there are servers out there that are using that much memory.
So even though RAM prices are dropping a lot, you don't want to hinder your overall performance, that was the reason why you bought more ram was to increase performance, not decrease it. I would suggest that anyone who uses Win9X/ME stay under that 512Mb limit since it will slow down your computer