Since my children have been I have never parted with a single article of their clothing. I have found I can use almost every element in another way. As they have grown so have the options for ways to use them. One of my favorites is old school shirts and this is the process I use to break them down.
Lay out your shirt on a big surface, be it a table or the floor doesn’t matter. Take a good look at it and see where and what you can salvage while offering you the largest pieces of material available for other sewing use.
The first thing I remove is the collar, this stretchy band makes a excellent ankle and wrist cuff for winter pajamas. As it is always a solid color, it can be used for both boys and girls.
Second to go is the thin band that wraps around the base of that collar, this along with the same style band often lining the shirts edges makes for wonderful stitching together and use for making rag rugs once you have a large enough scrap bundle. 
I tackle the sleeves as my third step, cutting them right at the seam. These semi circle pieces can be used to make new sleeves for younger children, sewn into newborn hats (wonderful for charities), as fabric to make slippers and booties (also wonderful for charities or for younger children), liners for winter mittens, making garden gloves for small children, sewn into a cup shape for dusting, stitched into small bags with drawstring attached for gift giving or party favors, or you can just use the fabric to make smaller quilt pieces or quilted hot pads, placemats, etc.
My next step is usually to remove the main large panel from the neck line. Begin by cutting up the sides, using care to not cut across the seams, you will be keeping the seams to use in that rag rug making I mentioned earlier.
Now picking a point right under the button holes I cut straight across, I do the same straight across cut in back right under the semi-circle with the size and care information at back of the neck. This gives me two decent size pieces of scrap fabric. This can be used for making new clothing for smaller children, doll clothing, quilt squares, throw pillows, just think outside the box and you can come up with plenty of projects.
This just leaves me with the neck/chest region remaining. Here is where I actually do throw away a bit of fabric. I cut panels on either side of the V button holes and throw the button holes away. I also cut the sections around the label area in the back of neck, throwing away the label section. I imagine I could go through ripping the seams on the back area to separate the fabric layers, I don’t bother. This leaves you a couple more small pieces that can be used in your mini quilt/quilts, or for making pockets, doll clothing, toss-a-cross rice squares, etc.
That’s it, the final step is a couple large Ziploc baggies to hold your rag scraps, elastics and a rubber maid bin to hold your material scraps. I have set a goal for myself to use them. Once the bin is full I open it and remove the pieces. From this I cut out a quilt pattern and sew it together, each quilt representing another passing of time and growth. Same with the seam bag, when filled I sew them together end to end and begin working on a rag rug or rag placemats.
There is one more trick I wish to pass along to you. If you have a shirt you really do not like pattern of, style of material, or that is badly stained and not salvageable for reuse as fabric. Beginning at bottom, cut 2 to 3 inch strips all the way up to the top of shirt. You want them to come off as circles, cut the circle to give you a flat strip of fabric, sew these together into a long rope and use that to braid or sew yourself a new rag rug. The stains, pattern, or material won’t matter.
A Little Slice.... 