To amortize a loan

When you borrow money, whether for a home, a car, or a personal project, you typically repay it over time through by making equal, fixed payments. But have you ever wondered exactly how each payment is divided between interest and principal, or how your loan balance decreases year by year?

Amortization refers to the gradual repayment of a loan through a series of fixed payments.
Each payment you make includes two parts:

1. Interest – the cost of borrowing money

2. Principal – the actual amount that reduces your loan balance

Even though the amount paid remains constant, the ratio of principal to interest varies over time.

Assume:

• Loan amount: $100,000

• Term: 5 years

• Interest rate: 9%

• Payment frequency: annual

• Fixed payment each year: $25,709

In the first year, most of your payment goes toward interest. But as time goes on and your remaining balance decreases, you pay less interest and more principal. (You pay less interest each year, more of your fixed payment goes to toward paying down the loan).

The balance, after the last payment, is exactly $0.

Note: This sheet uses modern Excel formulas to make the schedule dynamic. That means the schedule automatically updates itself whenever the loan amount, interest rate, or duration is changed.

The understanding of loan amortization:

• It helps us to understand how much interest you’re really paying.

• It allows us to compare loans and decide whether refinancing is worth it.

• It shows how much equity (ownership) we're building if the loan is tied to an asset, like a house.

Introduction to Financial Modeling

 Welcome to the thrilling universe of financial modeling! If you ever asked yourself how companies forecast their future, make million-dollar choices, or calculate whether a new project is worth the effort, you're on the right page. Financial modeling is a process of creating a crystal ball for dollars—without it being glass, of course. It is made from spreadsheets, mathematics, and a dash of imagination. Don't worry if you're unfamiliar with this; we'll make it easy to understand, entertaining, and loaded with examples to make you addicted!

Financial planning is another important way to use of financial statements. Most financial planning models use pro forma financial statements, where pro forma means “as a matter of form.” 

In short, a financial model is a spreadsheet-based simulation of a company’s financial performance. you use numbers in a spreadsheet. It’s a tool that helps you predict how much money a business will make, spend, or need based on assumptions about things like sales, costs, or market trends.

Now, why it’s awesome:

• Plan in Advance: Project profits, cash flow, or expenses to prevent surprises.

• Make Decisions: Do you open a new store? A model guides you.
• Impress Others: Show your skills off to employers, investors, or even friends at a finance-themed trivia evening!
• Get to Know Businesses: Models explain what drives a business—imagine an X-ray for profits.

Financial models come in all shapes and sizes, but all of them start with these things:

• Assumptions: Your estimate of what the future will bring.
• Financial Statements: These are like report cards for your business:
• Income Statement: Shows revenue, expenses, and profit
• Balance Sheet: Lists what you have (assets) and what you owe (liabilities)
• Cash Flow Statement: Tracks actual cash inflows and outflows (because profit doesn't always translate into cash in hand!).
• Calculations: Mathematics to forecast results, such as total up expenses or discount future cash flows to present value (more on that in future posts!).
• Outputs: Outputs, such as "You will make $500 profit in a month!" or "This project is a money-loser—Exit!"