Hey char, I used to do the towel thing too! When I first got Moe his 2.5 gallon, I got one of those jr. heaters from Walmart, but with the temperature in the house (65 mostly), the heater wasn't powerful enough to keep the water in the upper 70's, so I would leave the light on during the day to compensate, then wrap the tank in a towel at night so Moe could get some rest from the light. I was very surprised at how effective the towel technique was. Water temps stayed very stable between night and day doing this.
Finally the jr. heater broke (very poor quality, don't recommend; get a Hydor instead) and so I got a much higher-quality, 25-watt heater with built-in thermostat. Now I don't need the towels anymore because the heater regulates the temperature.