🚀 go-pugleaf

It really depends on how cheap you think cheap is and what your
application really looks like. For example, if your system only
turns in one direction then you don't have to worry about quad
detection and you can use a single switch style encoder.

However, If you started using several switches, then you might
quickly end up with a system that is cheaper than a standard
encoder.

One person suggested gearing, but often geared systems are
more expensive than just using a simpler (but seemingly more
expensive) optical encoder.

If I were developing a home-brew encoder, I would probably use a
knotched disk attached to the shaft and a radio-shack quality photo
transistor/detector pair reading across the gaps. Quad detect would
be accomplished by using two sensing points and spacing them so that
you got on-on at one detector's transition when the motor was
turning one way and on-off when turning the other way.

If I were designing system (not Home-brew), I would probably
contact companies like HP, and BEI for encoder information as well 
as companies that make magnetic devices (Red Lion) and Wiggand
Effect Sensors (SensoTec) and ask them what the cheapest system would
be for YOUR application.