I use a lot of fat quarters since they are handy for experimenting with new block layouts. I would hesitate to cut yardage into anything smaller since there are too many times when I need a large piece for setting the resultant blocks into a quilt. But I probably keep a lot less yardage around than most quilters because I just don't have room to store it. I've currently got 10 pieces that are in 2 yard cuts and another 20 that are 1 yard cuts. The rest of my stash (probably around 150yards worth) is either fat quarters or "precuts" that are mostly cut from my leftover scraps.
I generally only cut down pieces that are smaller than a fat quarter. For those pieces, I cut into the largest size that falls into one of the following groupings- 10" squares (layer cake size), 5" squares (charm size), 3.5" squares and 2" squares (a la Joan Ford, since I sometimes make some of the blocks from her quilt books). If I have a 2.5" strip that is at least 22" long I will put that with my jelly roll strips.
Anything that is too small to fit into any of those categories gets used for string quilting, or crumb quilting.
If I had plenty of money and plenty of room, I'd buy lots of those fat quarter bundles and lots of jelly rolls, then supplement them with layer cakes. Those are all very versatile units and you can make some very nice scrappy quilts with them
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