In those five days, consumers racked up $360 million in credit card debt. But the U.S. government spent its way to $17 billion in additional federal debt.

Today’s expert is Mark Perry, a professor at the University of Michigan-Flint, a visiting scholar at the American Enterprise Institute, and blogger at the website Carpe Diem. At Econ4U, we talk a lot about how you spend your money. But where is that money being sent? And is it a bad thing if we’re buying things made in other countries? We asked Perry for three things you should know about the “trade deficit.”

1.     Trade deficits are a positive consequence of cost-conscious American consumers and businesses shopping globally for the best value, quality, and price.

It’s frequently lamented that the United States has a trade deficit with China, Japan, and the rest of the world, meaning we buy more goods and merchandise from those countries than they buy from us. But it’s important to understand that it’s not countries that engage in international trade—it’s American businesses and consumers who actually do the buying and selling.  International trade reflects the voluntary behavior of millions of Americans who have collectively found great value by purchasing products—like iPods, trucks, computers, clothing, and so forth—produced overseas.

2.     The trade deficit as most people understand it doesn’t exist.

It was recently reported the U.S. had a $141 billion trade deficit with the rest of the world during the first quarter of this year (This means we imported $141 billion more in goods and services into the country than we sent abroad). But what doesn’t get reported is that the trade deficit was exactly offset by a $141 billion foreign investment surplus during the first quarter (This means that foreigners purchased more financial assets like U.S. stocks and bonds than Americans invested overseas).  The net result is that America’s total trade with the rest of the world was perfectly balanced in the first quarter of 2011, just like it is in every quarter and every year.

3.     Trade deficits are most often associated with periods of strong US economic growth—not decline.

Researchers at the Cato Institute found that, over the last thirty years, the U.S. economy grew at a healthy annual 3.6% pace in those periods when our trade deficit was growing larger—and an annual rate of only 1.0% when the trade deficit was shrinking. A recent example illustrates the relationship: even though it was reported that the trade deficit was “improving” (decreasing) in 2008 and 2009, America at that time was suffering from one of the worst economic downturns and financial crises since the Great Depression.

Today’s expert is William C. Wood, the director of the Center for Economic Education at James Madison University, and the author of Getting a Grip on Your Money. Putting yourself on a budget can seem daunting, especially if you’ve never tried it before. Dr. Wood has some pointers for people who are starting small.

1. FOCUS ON YOUR FIXED COSTS: These are the costs that are the same every month—for example, rent or wireless phone plans. It’s easy to see how these costs add up, and how much you could save if you reduced them. Go through your bank and credit card statements to identify expenses that are the same every month. Then figure out how you can reduce them or trim them down.

2. KEEP YOUR SAVINGS OUT OF SIGHT: Big savings are important, but they’re also tough to achieve. Don’t let that discourage you; start sooner, even if it means starting small. And when you save money, put it someplace where it can’t be immediately accessed – for example, in a savings account that’s separate from your checking account. That is, get it out of sight.

3. PENNY PINCHING IS OVER-RATED: If you try to track every penny you spend monthly, you’re setting yourself up to fail. Instead, settle for lower accuracy but make sure to review expenses every month. For instance, go for 80 percent accuracy—maybe letting a few small purchases fall through the cracks—but promise you’ll never miss a monthly expense review. (If your bank offers online account access, this process is easy and painless).

“The percentage of American workers with virtually no retirement savings grew for the third straight year.”

Let’s take a look at the numbers.

Percentage of workers with less than $10,000 in savings

2010- 43%
2009- 39%

Percentage of workers with less than $1,000 in savings

2010- 27%
2009- 20%

Percentage of workers who have something saved for retirement

2010- 69%
2009- 75%

Take a closer look at that last figure: It means that 31% of workers have nothing saved for retirement! The survey also found that only 16% of respondents were confident in their ability to save enough for a comfortable retirement.

Most financial advisors agree that retirement savings should be close to 80% of pre-retirement income – meaning putting away at least 6 percent of your salary per year is a great start if you start early enough, thanks to the miracle of compounding interest.

Check out our Money Matters article on retirement savings for more helpful tips on 401(k)s and planning ahead. And start saving now! There are no do-overs when it comes to saving for your future.

Image courtesy of Moneyning.

This week we’re covering a happier topic: how the same principle can help you build serious wealth for the long haul.

You already know it’s important to save for retirement. But if you are going to do it right, you need to remember two key points:

• Start saving as soon as you can: compound interest can make anyone rich, given enough time.
• Investment fees are not your friend: Even small ones will cost you big bucks down the line.

Let’s assume you plan to retire at age 65. If you start your retirement fund when you’re 25, your contributions have a full 40 years to grow. If you put $100 into your account every week, with a modest 6% return you’ll end up with about $867,000. Not bad, considering you’ll only have actually deposited $208,000.

But if you start at age 35, it’s very hard to catch up. Even if you deposit the same amount of money (by increasing your weekly contribution to $133) you’ll end up with only $583,260. Think about that: In both scenarios you put away the same amount of money, but delaying 10 years will cost you $300,000.

Now that you know when to start investing, how about where?

If you’re like most investors, you’ll end up with a managed fund, probably a mix of stocks and bonds. The most important criterion for choosing a fund is not its past performance. If you want to maximize your long-term returns (and who doesn’t?), pick a fund with low fees. Otherwise, your returns are going to pay for a money manager’s house in the Hamptons, instead of your own retirement.

For example, Vanguard is one of the biggest investment groups in the world, with over $1 trillion in managed assets. They also offer some of the lowest fees around. According to their website, Vanguard charges an average fee of 0.2%, compared to an industry average of 1.2%.

Now 1% may not seem like much, but remember, little differences add up over time. If you have $100,000 in your retirement account, that 1% is a thousand dollars – every year. In the example above, saving $100/week for 40 years will give you $867,000 (assuming a 6% return). But if you were paying 1.2% fees the whole time, your effective rate would only be 4.8%. Because of the magnifying effect of compound interest, that little fee would cost you a whopping $230,000.

Remember, no matter how old you are, the best time to save for retirement is right now. Check out Bankrate.com’s handy calculators to see how your money can work for you.

For the most part, the new rules will just stop problems before they start – like cracking down on so-called “universal default,” which previously allowed lenders to raise your interest rates if you were late on an unrelated payment. So if you pay your gas bill late, you don’t have to worry about your Visa interest rate going up (though late payments will still affect your credit score which may change the rates you’re eligible for on your next credit card).

Some of the most visible changes will affect teens and college students. If you’re under 21, you’ll need one of your parents to co-sign your application for a new credit card, for instance. And you’re unlikely to see credit card sales reps offering free t-shirts in the student center – the new rules prohibit banks from soliciting new business within 1000 feet of a college campus.

If you carry a significant balance on your credit card, the new rules could be a big help. Before your bank can raise your interest rate, they’ll need to give you 45 days written notice. And if the increase is big, you now have the option of closing your card and paying off the balance at the current rate.

And for those of you who only make minimum payments, you’re going to reminded monthly of the cost of that mistake. Starting this month, expect to see a “Minimum Payment Explanation” laying out exactly how long it will take to pay off your balance. For example, a mere $2000 on a card with an 18% APR will take 15 years to pay off if you only chip in the minimum each month. We’ve told you this before, but now you’ve got no excuse! From our perspective, this kind of transparency is what gives the consumer power.

Last but not least, watch out for annual fees on cards that used to be free. All these restrictions mean less revenue for lenders, so you can expect them to try and make up for it with annual fees. Unless you are getting some really amazing benefits, it’s probably not worth paying a fee for a credit card. Remember, it always pays to shop around for credit cards, bank accounts, and everything else.

Your $18,000 wedding? It may really end up costing you between $90,000 and $200,000. That $2,000 dress? Think: $10,000 to $22,000. The $10,000 food bill for your guests? Try $50,000 to $110,000.

That’s because the biggest cost of every dollar you spend is invisible. It’s all the money you’d accumulate if you saved it instead. Over long periods, this cost dwarfs the mere sticker price, often by a factor of several times.

Thinking about the long term rate of return (and compound interest) on the money you plan to spend on your wedding is worth a look.  It’s easy to cut corners and still keep the day special if you look at all the elements and find ways to save.

There are lots of great ways to budget your wedding and avoid lavish overspending.  Also check out TheKnot.com for some helpful thoughts on wedding costs.

Plan a wedding under $10,000, Ways to Save Money, or the most important, 10-Hidden Wedding Costs.

Do you have any cost-saving tips of your own? Share them in the comments.

Wondering about the long-term value of higher education? Look at the real value of a college degree in Learning Equals Earning.

Did you start a new job recently or are you just curious about what all those deductions in your paycheck mean?  Pay Checks: Who is FICA and why is he getting all my money? is a great place to start!

As always each section of Money Matters offers detailed insight into aspects of budgeting, spending, earning, saving, investing, and borrowing and managing credit.

United States Better Business Bureau- 2008 Statistics

Is this to say that using a bank to house your savings is a bad idea because there have been complaints filed against them?  Certainly not.  It does however remind us to shop around when looking for the best place to meet your needs when it comes to financial services and credit options.

A credit card is not the answer to everyone’s credit needs just as a short-term loan might work better for some than for others.  Educating yourself on the types of credit options available and the places to get them is the best thing you do.  Check out our Money Matters section on Borrowing and Managing Credit.

Looking to better educate yourself on another aspect of personal finance – like how to select a financial advisor – check out our new Money Matters piece on selecting a financial advisor.

A perfect example of this is the Earned Income Tax Credit (EITC), a tax credit created to help those who do work, but only make a modest income.  The federal government considers this credit “refundable,” which means you can get a refund check even if you don’t have tax liability.

The biggest problem with the EITC is that many who qualify don’t take advantage of it. But applying for the credit is simple – it just requires filling out a tax return at the end of the year.

Use the chart we’ve put together (using the IRS Income Limits) to see if you qualify.

Basic EITC Qualifications: (For the full list of qualifications visit IRS.gov)

-          Valid Social Security Number
-          Have earned income from employment, self-employment or another source
-          Not using the “married, filing separate” filing status
-          U.S. citizen or resident alien all year
-          Cannot be the qualifying child of another person
-          Adjusted Gross Income and earned income must meet the Income Limits
-          Investment income must be less than the Income Limits

Income Qualifications:

*The income limit applies to your Adjusted Gross Income and Earned Income – each MUST be less than the income limit.

You can also check out the IRS’ EITC Assistant tool here.

Also, be sure to see if you qualify for similar deductions on the state level. Some states also have an EITC credits – see if you qualify!

Check back next week for more Tax Tips!