Ipod newbie question?

Simplest/cheapest way: get a mini to L/R rca interconnect (Radio Shack,less the $5). Put the mini in the iPod headphone jack and rca's in the L/R aux in on your receiver. Tip: have the iPod volume all the way up and use the vc of the receiver to adjust the level.

Little better: Get an Apple docking station ($50). You still need the mini/rca but the Apple dock charges the iPod (and has its own analog out) so you don't have to monitor the battery level.

That would stay within a "tight budget". If you can/want to go more, let us know.

Update: I just purchase and Audio GD Sparrow dac that has a USB input. Can I go directly from the ipod to this dac via USB or should I get a usb to coax converter? Thank you!

you would need a dock that pulls the digital signal off of the iPod before the iPod converts the signal to analog. The Wadia iTransport dock does this. Place you iPod touch into the Wadia dock and go with digital coax from the dock to your DAC. There are several of these Wadia units on A'gon now, search on Wadia and look at the iTransports. You also get a remote that will control the iPod track, FF, seek, etc.
Good thing you have a touch, earlier generations of iPods do not allow the digital signal to be separated before hitting the output stage...only most current generation of iPods/iPhones/iPads do this...