How do I deny access to everybody but me in Windows 7?

I agree, the security tab is certainly confusing.

I think the key thing to understand is you can Deny a privilege to "everyone else" without explicitly checking the Deny box. "Deny" takes precedence over allow, so denying everyone will mean no-one has that privilege, even those to whom you explicitly grant it.

I think you want this set up;

Your folder

• Everyone: Uncheck all boxes
• Your user: Check "Full control"
• Remove any other user

Your wife's folder

• Everyone: Uncheck all boxes
• Your wife's user: Check "Full control"
• Remove any other user

Shared folder

• Everyone: Uncheck all boxes
• Your "kids" user: Check "read"*
• Your user: Check "Full control"
• Your wife's user: Check "Full control"
• Remove any other user

Child folders will inherit their permissions from their parents.

*Here you could optionally deny write, but as the kids user and the everyone user does not have a "check" for write, the user does not get that permission. If you wanted "everyone" to write, but not kids, this is where you would use Deny.