City were slapped with a two-year ban by UEFA this month after being found guilty of breaching Financial Fair Play (FFP) rulings.
As a result, Guardiola and the club's biggest stars' futures have been cast into doubt with the Premier League champions likely to return to the competition in the 2022/23 season.
This has intensified the pressure of the Citizens squad to lift the title for the first time in their history in the current campaign.
But Zinedine Zidane's side, who've won four of the last season titles in Europe's elite club competition stand in their way in the round of 16.
City have never beaten Real in each of their four previous meetings with two defeats at Santiago Bernabeu and two draws at the Etihad.
"We have to show our personality," Guardiola said, as per BBC Football. "I know my players, myself, all the club want to fight until the end for this title.
"But if you want to do that [win the title] you have to face these teams sooner or later. You have to beat Madrid, you have to beat Barcelona, you have to beat Bayern Munich. You have to beat the big, big teams.
"If we're able to do it we'll be so happy. If not then next season... well, next season I don't know but when we are able to play we are going to come back."
Real Madrid: Courtois; Carvajal, Varane, Ramos, Mendy; Modric, Casemiro, Valverde; Isco; Benzema, Vinicius Jr.
Manchester City: Ederson. Walker, Laporte, Otamendi, Mendy, Rodrigo, Gundogan, Mahrez, De Bruyne, Bernardo, Jesus.