I made my daughter several dresses at the beginning of this school year. I made them out of inexpensive quilting cotton, knowing that as a small child, they would almost inevitably have "bad things" happen to them.
So here's the row of dresses when first made:
And here is her butterfly dress as it was yesterday, when I ironed it (quilting cotton: needs ironing). You'll note the fading and chocolate? stains.
She has a maximum of five more wears for this dress before the school year is over - so she can keep it in the "school" pile. When the year is over, though... we'll do the annual clothing review.
The "still great" clothing will stay in her closet for church, going out, generally anytime she needs to be presentable. The clothing that is slightly (but not massively) stained or faded goes into her "around the house" clothing pile (aka play clothes). The clothing that is too small, very stained, torn or otherwise destroyed gets moved into the rag bin (if knits) or tossed (if woven). Anything that has miraculously not had bad things happen to it, yet has become too small, goes into the giveaway pile.
This way we get maximum wear from everything we buy or make.