So frustrating! I was almost done typing my answer and accidentally erased it...so here's the shorter version.
When my oldest was young, I would periodically take toys she didn't play with and pack them away. If she didn't ask for them for several months, they went into either the donate pile or the garage sale pile.
As she got older, I stressed the importance of making way for new things, and showed her the show "Hoarders." I told her that people who keep everything eventually end up living like this. That's a very good way to illustrate the concept to children. She's very good at clearing away her own things (she's six) and choosing whether to donate or sell. She understands that every year, our garage sale is what affords us our swim passes for the summer, and that if we want to swim all summer we have to make X amount of dollars...and we all contribute. She also understands that there are children with very little, and that some of her things (usually those she's really enjoyed and thinks someone else might enjoy) go to charity.
For my second child, I buy less. Because they are five years apart, I have regifted to her (and it'll be many, many years before she realizes what I am doing.) For example...the Little People sets. They were expensive, quality toys so I saved them from my first child. Packed them away for years. Recently wrapped them up (for a birthday) and gave them to my youngest, who was just overjoyed! Bonus...no toys had to go in or go out in order for that gift to take place. I know that's not practical with every situation, but it works for us.
I want to suggest you enlist your children's help when getting rid of things. You may be surprised at what they are willing to part with. If they won't part with anything, show them Hoarders. :)