One word: Target.
Okay, a second word (words, really): consignment sales. I'm lucky that in the area I live, there are about 4 yearly very good sales for "gently used" clothes. I try to take advantage of them. While not everything will be excellently priced or in wonderful condition, I have managed to find a great toddler-sized winter-coat for as little as $3, a perfect Thanksgiving dress (never worn) for $2, and sweaters for between $1-$3. I believe firmly that small children need clothes to play in more than they need clothes to be displayed in; therefore, as long as something is fit, clean, and presentable (meaning no holes/tears/etc), and easy for them to move around in comfortably then it is wearable. So handmedowns/preworn clothes (especially for little kids who outgrow those clothes so quickly) are really ideal.