Synch your iPhone with a computer before the update and you should not lose your applications/contacts when you install the update. In the unlikely chance the upgrade deletes any contacts, after the update, re-synch the phone with the same computer. You should have no problem.
I bought a iPhone couple of days back..and I have downloaded the best apps available and I had all the important information in it. Now I want to update it to 4.1 so I just want to know how to keep my data safe. I am not ready to loose a phone contact. hope you understood.
Any help is greatly appreciated