I think the fundamental principle to remember here is that we must play a major part in the forming of our own heart. The heart we create for ourselves in the end must have been created by each of us through our own free-will, without any co-ercion from God (who is by nature, extremely gentle and also respects our free-will above all else). Otherwise our heart will not be our own, but rather created by God, and we will be more like machines, programmed by God, than humans in charge of our own destiny.
Everyone is called to be perfect (like God), however, we are works in progress (i.e not perfect yet). And because everyone on earth is like this, and the people here will always be like this, there can never be "a heaven on earth". That is implied in Jesus' statement above. Although, earth may be more or less a paradise depending on the hearts of men. Let me explain.
To create something good and useful out of metal, the metal must be first softened by an intense fire. This fire makes the metal malleable and then it can be more easily shaped to become what we wish it to be. A similar process applies to human souls, which are inclined to both selfishness and love for others. Which direction we go is up to us. But the fire of hard earthly experiences softens our sometimes hard hearts and makes them more malleable to our own free will. Our trials allows us to emphasise with others, to help each other and develop bonds of love, in short they allow us to execise our free-will more freely with a push - through bitter experiences sometimes - towards good.
Thus, through a metaphoric "fire and sword" we are shaped gradually into something more perfect, as a joint exercise between our free-will and God. We can choose to respond to difficult situations with love or with selfishess. Each choice shapes our heart one way or the other. I think you will agree that each choice that increases our love activity leads to more and more joy, whilst each choice that takes us the other direction makes us more anxious and insecure, providing an impetus for soul searching and change. Thus the further a person or a nation is from God, the more unpleasant will their circumstances be, usually as a consequence or their actions (or the actions of the preceding generations which led them into spiritual darkness - thus the "Sins of the father" are visited on the sons). This, however, will have an ultimate good effect, as they will soon seek to improve their situation and this will lead them to much soul searching, and a greater chance of returning closer to God's order (perhaps this explains all the confict in the world now? A world which no longer has much faith or belief in God.)
Thus I believe we should not punish ourselves too harshly over past sins. It is necessary to recognise sins as such, be honest about your weaknesses and failings - both to yourself and publicly to others. Then actively work to change and prevent them recurring. If the effects of past sins can be corrected, then they should. Otherwise, one can ask God to do this for them (and ask of course for forgiveness, as a development of humility). But this is then enough. Once one is repulsed by a sin, and seeks with all his heart to avoid it, there is no point in further punishing oneself over what has happened. God knows we will sin, it is part of His process of perfection. You can think of this as the fruit is somewhat sour until it ripens or the clay being mis-shapen until completed. We just need to recognise our weaknesses and correct them. So we must forgive ourselves - and each other - for our various sins, as God will forgive us.
One final note, however. We are told not to judge others. One may be tempted to see someone in difficult circumstances and maybe judge them as sinner or not based on this. Bible teachings are quite clear on this - we are not to judge! But only to seek to help each other. If we think someone is a bad person, then we should seek to help them with love and care, just as we would someone who was bodily sick. Our prisons and laws should have this aim only in mind. Also, in regard to judgement, some souls undergo a harder life than others. This is through no fault of their own, rather it is a favour to the rest of us. Stronger souls can bear harder trials. If mankind has created circumstances where some people can not avoid extreme hardship (eg. through a difficult upbringing or extreme depravation) or diseases (through chemical pollution or similar) then it is my belief that stronger souls are born to bear this. Thus in many cases suffering is not necessarily a sign of sin, but perhaps a sign of self-sacrifice?