You'll Become a Millionaire -- Here's When

You -- yes, you -- could become a millionaire. The trick lies in figuring out just how to reach that goal from where you are now.

Several factors will influence how you'll get there:

• How much you have invested already.
• How much you can save and invest each year.
• How long your money will have to grow.
• What average annual return you expect to earn.

Let's see how these factors can work for you, supposing you're 40 years old with a $50,000 nest egg:

These reasonable inputs would let you achieve millionairehood within about 20 to 30 years, depending on how quickly your money grows, and how much you manage to save and invest.

You might already know that the stock market's longtime average return is about 10% per year. But remember, that's a very long-term average -- stocks could average 8%, 12%, or something else entirely during the 20, 30, or 40 years that you invest. And that's not the only complication the market could toss your way.

Before you start seeing dollar signs ...
As we've seen over the past year or two, even stocks considered the safest blue chips can have widely differing performances over short or long stretches of time. Here's an interesting exercise: Think of the companies that interest you most as investments right now. You don't know how they'll do in the future, but you can look up how they've fared over the past 10 or 20 years. Not all will have done so well in the past, despite your rosy expectations of future performance.

Here are some companies I got when I screened for enterprises with promising characteristics, such as returns on equity (ROE) above 15%, three-year revenue growth rates of at least 7%, and P/E ratios of 25 or less, along with four- or five-star ratings (out of five) in our CAPS community of investors. I'll add in their 10-year average annual returns:

Data: Motley Fool CAPS, Yahoo! Finance.
*Nine-year average return.

These are impressive companies and are fine candidates to research for your move to millionairehood. But even impressive companies can have wildly different performances over long periods, so keep that in mind. It also serves to remind us how important it is to do as much research as possible before investing and to find the companies with the best chances of strong growth.

Digging into numbers such as those above is a good place to start, but dig deeper. A high ROE, for example, can be partly due to high debt, which isn't always such a good thing. A P/E of 15 can be low for a software company, but high for a carmaker.

Your best path to a million bucks
You can get to a million faster by saving and investing more, and by picking the right stocks to generate higher returns. And you'll stand a chance of compounding at higher rates if you invest in stocks with the healthiest growth rates.

One great place to seek strong growers is among smaller companies. After all, it's easier to double your revenue from $50 million to $100 million than from $50 billion to $100 billion. To an extent, the outsized returns in the table above reflect companies that were much younger and smaller 20 years ago.

Small-cap stocks outperform their larger peers overall. And according to data compiled by my Foolish colleague Tim Hanson, all of the past decade's best performers were small, most with capitalizations less than $100 million. Check out the 10-year average returns of these strong performers over the past decade:

Data from Capital IQ, a division of Standard & Poor's.

Compare those puny market caps with those of today's blue chips. General Dynamics' approaches $30 billion, while Petroleo Brasileiro's tops $170 billion. Which kinds of companies do you think stand the better chance of growing really quickly?

It's critical to choose your stocks well, and to keep up with your holdings, making sure you're devoting money to your best ideas. It's also critical to start soon. The more time your money has to grow, the sooner you'll reach a million.

If you're looking for small companies with lots of room to grow, try our Motley Fool Hidden Gems newsletter, absolutely free. Even in our recently crummy economy, its recommendations have been outperforming the market. You can access all past issues and recommendations with a 30-day guest pass.

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This article was originally published June 15, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of no stock mentioned in this article. General Dynamics is a Motley Fool Inside Value selection. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Petroleo Brasileiro is a Motley Fool Income Investor pick. The Fool owns shares of XTO Energy. The Motley Fool is Fools writing for Fools.