3) Set firefox's proxy to localhost:8118 for all protocols.
Oh, maybe step 1.5 should have been to turn off privoxy's logging, both because it could log something private, and because log files aren't needed in this case. I also disable privoxy's ad blocking because it breaks the NYTimes.
In addition to "relocating" you, this has the effect of allowing one to use unencrypted wireless APs in cafes and only worry about the same amount of network sniffing one might worry about from one's own ISP. This is why I decided on this set up to begin with, in fact.
It's easier to use -D 8118 and set a SOCKS5 proxy in Firefox instead of an HTTP proxy. Then you don't need to install Privoxy. I use this method to keep my passwords from going across untrusted wireless networks in plaintext.