I use pretty much this system when I'm working, except for the paper notes. Instead, I record everything in plain-text files, which I can search with my editor or grep if I'm trying to figure out six months later why I did what I did. For major, long-lived projects, I'll create a separate file for the project.

I find that one big advantage of writing down what I'm doing is that if someone does interrupt me, I can concentrate more on what they're saying rather than frantically trying to keep all the state of my coding in my head while hoping they'll just get the hell out of my office already. It makes me a more pleasant person to work with.