How do you teach your toddler Phonetics?

I am not a teacher and I don't have a single clue on how will I teach Gabz how to read. My sister, who is a teacher, teaches her kids how to read at the age of three to four. I always read books and stuff to Gabz, and she loves it to the point that she was able to memorize the stories in her books. The last time, I borrowed a DVD Phonetics at the library, just to check if she will be interested. She was watching it the first time but got bored the second time. I thought, maybe she was not ready yet. But one day she surprised me by saying the sounds of the alphabet, the way she watched it in DVD. So, I encouraged her and taught her some other alphabet sounds. Next thing she did is to make rhymes. She would tell me, "Mommy what rhymes with bed?" and I will find a word that rhymes with bed. This became a game for us. Then she would tell me, "Mommy, B is for Bath!" At first I was surprised, thinking maybe she just heard it somewhere? But then, she would tell me a word and then another word that she could think of. She could only find words that start with B and P. But it is a good start right? Sometimes, we just find words in the house and let her guess the beginning sound of the word. It is fun and she enjoyed it a lot. I just hope her enthusiasm will always be there.