There are a number of ways to deal with this problem. First of all, there is the donation route. If you don't have close friends with similar aged babies, you can put aside certain things for when they do, or in the event that you have another. The rest of the clothes can go to the Goodwill or Salvation Army. These are also a great place to find gently used baby clothes for incredible savings.
Special occasion attire like baby's coming home outfit, first Christmas, and Baptism can be saved in a special place for passing on to a next generation. A great way to do this is by creating a memory box. Get a small trunk at a craft store and decorate it however you'd like. Fill it with small mementos like the baby's hospital bracelet, first outfit and blanket. As the baby gets older you will have more things to add to it. This is a great way to preserve memories that your child may not have the foresight to think of now, but will appreciate very much later.
Using material from old baby clothes to make new baby clothes is a great way to save money and get a little more use out of the items that your child quickly outgrows. Making t-shirts into cute patchwork dresses, and pants into shorts are some quick fixes to pinch pennies.
Another way to use up material from old baby clothes is to make stuffed animals. Do you have a favorite t-shirt of your baby's that his or her little arms just don't quite fit right in anymore? Using the material to make a little stuffed bear is a great way to preserve that memory for yourself and pass something very special on to your baby. The same thing can be done, if a hobby persists, with socks and jeans as well. Soon all of your friends will be begging for little stuffed dolls made out of your baby's old clothing.
If you are in fact creatively inclined, another great way to reincarnate your baby's clothes is by creating a memory quilt. Save bits and pieces of your baby's clothing and use it to create a full sized patchwork quilt for when your baby gets their own big bed. That kind of sentimental value also makes a great gift for a graduation or a wedding (if you can wait that long to show off your handy work).
If you're planning on having another child, you have a built in way to get rid of all of the extra clothes. You can put away the clothes that your baby grows out of in a storage area. Just make sure you launder everything when it comes back out for round two. Sure, it stinks to get hand-me-downs, but it is unlikely your infant will notice, let alone care.
