1 1/2" is as small as I go. I toss the rest or throw it out for the birds to make their nests with. If I need a tiny piece for applique in some project I don't feel badly about cutting a snippet off of a larger piece of fabric.
I'm working on cutting all of my scraps into 1 1/2" blocks right now myself and also have some HST that size that I've made for my postage stamp quilt. Once this one is done, I doubt I'll save anything smaller than 2 1/2".