I did this back in 2001 or so with a 486 machine to run my Turtle Beach Audiotron with Trustix Linux. I wanted it to run all the time, but didn't want the (expensive 9 GB) hard drive spinning unless the wife was playing music via Samba.

I had a directory on the hard drive to hold the OS, used tar to package it up, then modified the initramfs scripts to untar that into a tmpfs and pivot_root to that instead of the hard drive. Did permanent updates using chroot to the hard drive directory, respinning the tar file, and rebooting.

Of course, that whole OS was about 76 MB in size as I recall and the machine had 128 MB of RAM. Nowadays, I would put an SSD of some kind in, and call it good.