I'm a big believer in using something until it's totally used up. If there's any life left in an article of clothing, I find a way to use it. If an item is in good condition, and one of the kids has simply outgrown it, we donate it to a local charity. The girls often use old baby outfits as clothing for their dolls and stuffed animals. And, if you're planning on having more children, there's always the alluring idea of hand-me-downs (something I didn't appreciate until I became a parent myself!)
But what about those items with formula or food stains on them? I never feel comfortable donating these items, because they're often just a mess. I was looking at a bag I keep in the closet of some of the outfits my kids have outgrown or stained up, and it hit me: I want to make a quilt out of them. This is a great project for those stained items, because you can simply use the non-stained parts in the quilt, and use the rest as rags (if the items are cotton or wool, you can even compost them.)
I haven't done it yet, but I'm thinking that my big project this winter will be making a quilt from my children's old, stained clothes. What would have been garbage will now become a treasured family heirloom, and I can look at each square and remember all of the special moments, large and small.