The choice of spacing is really a design question so you have a few options. Generally on small tile the edge will have two small bumps that act as built in spacers. You then only need to butt them together. On larger tile, like you are using, the edge is flat so you choose your own spacing.
Typically, you want the spacing as small as possible given the natural differences in size between the different tiles.
I am doing my tub surround now and using a big tile, 12x24. I am spacing at about 3/32's or just under 1/8.
As for grout, narrow spaces of 1/8" you use non-sanded grout.