OK, so when you have your computer turned off, everything is stored on the hard drive.
Problem -- the hard drive is a mechanical device, and slow (in computer terms). So, to access your stuff faster RAM is also used (your 1GB), which is in the form of microchips.
When you turn your computer on, it loads what it needs immediately (i.e., the important parts of windows), into RAM from your hard drive. As you open a document such as an essay or spreadsheet or music or whatever, it is loaded from hard drive to RAM too. As it's being used, you're using RAM. When you press save, it saves this back to hard drive.
RAM is 'volatile' memory, meaning that it loses its memory when the power goes. This is why you can be typing a letter and the power goes or it crashes, and you lose it if you don't save it -- it hasn't been saved to hard drive yet!
You can store as much as your hard drive allows, not your RAM.
But, the more RAM you have, the more you can do at any one time (since it can store more for quick access). Some things eat more memory than others. Letters etc. don't take up much memory, but video editing for example takes up a lot of memory so needs lots of RAM too to store as much of it as it can as you're working with it.