Teaching Reading

I had an interesting conversation with a friend recently regarding teaching reading. I've been doing a lot of reading and thinking about this subject lately. Lilly is at the point where she knows the upper and lowercase letters, knows their most common sounds, and can decode (sound out) three and four letter words with short vowel sounds. She has learned these things over a period of about two years, mostly in short bursts when I decided to teach her. I pulled way back on teaching reading this spring when I read a number of books that discouraged early teaching. However, Lilly is increasingly interested in writing and spelling, and I think it is time to address words again. My plan is to combine reading, writing and spelling. I am getting a notebook that is going to be Lilly's "Word Book". I will choose a story or poem, maybe a nursery rhyme, to start, and have Lily write the words in her book, using a different page for every word that represents a new "rule" (i.e. silent E with a long vowel). I need to study what Charlotte Mason has to say on teaching reading, but it seems from what I have read that she favors a sort of "whole word" method with only basic phonics. At this point I personally lean towards more systematic phonics teaching, if only because that was the system that worked for me personally. Lilly seems inclined to think analytically, and I think she would enjoy phonics analysis.
I expect my "system" will evolve as we go along, so I will keep you updated.