When my oldest was just a baby, someone told me about consignment stores.
I was very blessed by my family because KAT was the first granddaughter and thus was spoiled with clothes. Especially from Osh Kosh because my sister worked at their outlet store.
But we still did not have a clothing budget and as you well know, kids grow out of their clothes regularly. I found an excellent, high quality consignment store nearby and have taken clothes there since 1996. I bring my clothes in, and the money goes on an account. I simply go in, ask what is on my account and come home with more clothes.
They are very picky about what they take so I know I'm getting quality and often name brand clothing. Many times, brands that I would not normally be able to afford. When the girls grow out of clothes and they are still in great condition I place them in a bag to head to Denim and Frills. I pay attention to seasons (since they take things seasonally). The store is set up so cute and they often sell items that are created by other moms. What they won't take I either leave there for them to donate, or if it's close to garage sale time, I'll take it back and sell it at my garage sale. Either way consignment is the way to go. Find a shop that has a good percentage they will give you. I don't do buy out because I get more by consigning.
Consigning....it's a great way to get rid of the old and bring in the new!
The other thing that works is "swapping" clothes. If you have friends or family with children that are staggered with your own kiddo's, consider swapping clothes. We've done this as well. My girls love getting clothing that came from friends.