You're a brave woman! Two young kids in close proximity -- you definitely want to maximize your use of the space to minimize the nagging, fighting and the times of “Mom! He won't leave me alone!” Fortunately, with just a moderate-size room, you can organize the furniture and accessories so that both of your youngsters still feel like they have their own special area. The bonus to a shared room is your kiddos are still close enough together that there's always a special friend nearby.
Find the approximate middle of the room and make marks on the walls with pencil to keep track of each youngster's space.
Paint each half of the room a different color to signify the separate spaces and to let each of your kiddo's individual color tastes shine through. Rather than a harsh dividing line where the colors stop, make it a smooth transition with a decorative border over the top of the paint edges.
Set up a bookshelf, dresser or other item to provide a clear divider for the room. Now each child has his own special place to retreat to when he's feeling overwhelmed or wants to play by himself. (Also good for when you've had enough of, “he looked at me…he's bugging me!”) If a bookshelf takes up too much room, use a screen divider, but anchor it to the wall to prevent accidents if it's bumped.
Arrange the beds head to head so they're facing opposite directions. This way, when your kids are in bed it'll feel like they're in their own private little area.
Get two of everything if there's enough room that your youngsters won't feel overcrowded. Now there's no need for fighting over access to the dresser or who gets to sit in the special chair today. (They'll find things to fight over either way, but why not avert one crisis if you can?) Put a small dresser in each little area, set up a small chair or beanbag cushion on either side and let the kids help decide where each item goes.
Let your children help pick out a few individual accessories to decorate the room. Your toddler may want a little princess mat at the foot of her bed, while your preschooler wants a poster of her favorite cartoon. These little touches help them to express their individuality.