I cut 2.5" strips and sew the binding on a scant 1/2" in from the outside of the batting, which I cut 1/4" longer than the quilt top. The edge of the binding is placed even with the edge of the quilt top, not even with the batting. That results in a full 1/2" binding. The "scant" depends on the thickness of the batting. However, there's no one right answer to your question. Wall hangings often get skinnier bindings, and some people prefer a fatter binding on bed quilts. Some people line their binding up differently with the edge of the top, some cut their batting and top evenly, etc. As long as you wind up with a binding that is full, and even, you're doing good.