When you say "older iMac", how old do you mean? You can go into System Information (accessed from the Apple Menu) and it will tell you the exact model.
RAM upgrades are very cheap at the moment. I bought a new (mid 2011) model iMac, and Memory Express currently sells 4GB sticks of RAM for
only $30 each. Depending on the age of your computer, though, it may use an older, more expensive type of RAM.
Re: upgrading to Lion. I'd say it's worth it, and it's a pretty cheap upgrade. If your Mac's performance running Snow Leopard is acceptable to you, your computer will likely run Lion just fine (even moreso if you also add more RAM).
Upgrading to Lion won't reset your permissions, so you're a bit out of luck there. If your permissions are broken beyond your ability to fix them, a full HDD wipe and OS re-install is your best bet, but if you're uncomfortable with this, don't do it.