Unfortunately you are not going to see much change in your body with 5 pounds weights. That is way too light to really sculpt your muscles (and I don't mean getting ripped). A lot of women stay away from heavier weights because they are afraid of getting bulky. But as it's been said about a hundred million times, getting bulky from lifting heavy weights is very difficult for a women to do (without doing a bunch of other stuff like eating a higher protein and calorie diet and serious training etc).
Doing squats will help tone your lower body, but you shouldn't neglect your upper body either. Do strength training that will help define your arms back, chest and abs so that when you get to your goal weight you'll look great all over.
I understand being on a budget, but there are a lot of DVD's and/or Youtube video's that have exercises that help define your muscles using your body weight and bands as resistance. Jillian Micheal's 30 Day Shred or Total Body Workout are two that I've tried that have really upped my strength. There is also a strength training sub-forum right underneath this exercise one that you should check out, it will give you some ideas on how to get started. Also check out burnthefatblog.com, he has a lot of great advice on weight loss and strength training.
Good luck!