I have two boys two years apart & I save everything, literally everything good condition or not. I still buy ds2 new stuff too, his wardrobe is much fuller than ds1 who gets bought all brand new stuff. I tend to keep everything because I know at some point ds2 will need the scruffy clothes, we have an allotment & I put the well worn stuff on him then. It makes me feel better as I know how much clothes cost me.
Once ds2 has grown out of hand me downs I do tend to get rid or sell it on if it's in really good condition. I don't think I could put a 3rd child in the same items.
Ds2 loves getting hand me downs because he is in to similar interests as ds1, he's loving all the Spider-Man stuff right now that was DS1's. They are in totally different sizes though, ds1 moves through clothing size at the stage for his age, so at age 6 he moved into age 6-7. My youngest though is very petite & tends to stay in a size clothing for much longer, he's Ben in age 2-3 for 18 months now.