The invention discloses an Al-Fe-Zn-Mg rare earth alloy wire and a preparation method thereof. The aluminum alloy comprises the following elements: 0.3-1.2wt% of Fe, 0.01-0.3wt% of Zn, 0.01-0.4wt% of Mg, 0.1-1.5wt% of rare earth element and the balance of Al and inevitable impurities, wherein the rare earth element is composed of one or more of cerium, lanthanum, neodymium and yttrium. The preparation method of the aluminum alloy wire comprises the following steps: preparing an aluminum alloy rod through smelting, casting and rolling, performing insulation treatment in a heat holding cover at 240-320 DEG C for 10-20 hours, wiredrawing and extruding insulating material on the wire; or preparing an aluminum alloy rod through smelting, casting and rolling, drawing the aluminum alloy rod to prepare the aluminum alloy wire, performing semi-annealing treatment in an annealing furnace at 340-380 DEG C for 5-10 hours, and finally extruding insulating material on the wire. The aluminum alloy wire prepared by the method of the invention has excellent electrical property, mechanical property and corrosion resistance and can be used in the wire and cable conductors.