Why do people use the phrase "having cake and eating it too"?

Most people don't understand the meaning of this old English saying; It means you cannot possess or retain your cake and also eat it. It's one or the other. Either you eat it, or you keep it. Therefore the saying means, essentially, "You can't have it both ways".

A reference to going down on a woman; chewing a piece of custard pie.

It means you can't eat a cake and continue to possess that cake once you've eaten it. It's used to tell someone that they can't have two good things that don't normally go together at the same time, like eating a cake and then continuing to possess that same cake so you can eat later. Once the cake is eaten, it is gone. It's like saying 'you can't have it both ways'. People use it because it sounds a bit nicer than just telling someone they can't have both things in specific situations. 

It's a confusing expression.

We use "have" to mean both posessing something (I have a book) and having consumed/eaten something (I have waffles for breakfast).

In this case the expression means possessing something. (I have a cake in the kitchen, not I have cake after dinner.)It's basically saying once you have eaten all the cake, there is no more of that cake to eat.