Runthemall,
I get cheap sets of diamond coated needle files at local gun shows. I use those and Harbor Freight/Sears etc. type sets of needle files as well. They work fine. As the others have said, drill the holes from the back side of the guard a little wider than the front. It doesn't need to be sloppy wide, just wider than the ricasso. Get the hole opened from the front with the needle files until you can get a 6" flat file into the slot. They are typically 1/8" thick. I get a handful of them at the big home stores. Use that to straighten out the lines of the hole opening. Easy does it. Take a few strokes and check your fit, repeat. Shoot for a press fit if possible on the first go. As the others mentioned the thickness of the tang should be SLIGHTLY tapered up until about 1/2" or so from the blade shoulders. Otherwise you will never be able to get a seamless fit. To get that kind of fit you need three things, the guard press fit along the sides of the tang, straight and flat blade shoulders, and well cut radii on the short sides of your guard hole. If you get the guard on very close to being seated but there is just a tiny gap left at the top, bottom or both the likely cause is not a smooth enough transition or radius from the inside of the guard to the face surface. Sometimes it takes very gentle strokes blending up onto the face surface to get that seamless fit you want. To make that happen you will want files with "safe sides". When you are new at this there are certain tools that raise your game to another level. A decent grinder of course, carbide-faced file guides and so on. Files with safe sides are one of those tools. Get yourself a few 6" flat files from your local hardware store. Take one of them and surface grind the teeth off the wide flat faces and leave teeth only on the thin edges. Be careful not to overheat the file while doing so. Now you can cut those radii in the guard slot without also inadvertently widening the slot. If you have filed the slot too large as in your picture, all is not lost. That gap is fairly large but you can save it if you are careful. Take a tack hammer, or a larger hammer and a medium sized pin punch to peen(Pein) around the edges of the hole. This will cause the surface to spread and start to close up the hole. You may have to do several rounds of peening to get the hole closed up sufficiently to allow a press fit. Again, easy does it. The bigger the dents you put in the guard face the more material you'll have to remove later to get it flat again.
PS. It's hard to tell from your picture but the corners where your tang meets the blade shoulders at the ricasso should have a small radius. This helps to spread out stresses. A square corner there is a no-no. This will cause a weak spot as the sharp corner will cause stress risers and may lead to failure of the tang.