NT variants of Windows (such as XP) can generally use large amounts of memory well. Earlier versions of windows like 98 have poorer utilitization for memory above 512 MB. There are some Microsoft artilces on this subject about limitations of Windows 9x for memory greater than 512.
Going higher than 512 in an XP system will generally help. However processor speed, hard drive performance, and other issues also enter into the equation. Most systems have a level of memory that going beyond offers little improvement.
Starting with 512 is a good place to begin. Then see how things work and try to determine where slow points are located. Sometimes they are hard disk related, and memory will not always help here.
Ed