How to keep music on external hard drive, but play on iMac?

So, I have nearly 500GB of music on an external hard drive. I don't want to move them into my iMac, because it'd obviously eat up all my free space. My question is, how can I keep them on the external hard drive, but still access and play them while I'm on my Mac?
How would I do so using itunes? Would it be simpler to use a different program? If so, which one? Cost?
Could some please tell me how to do this step-by-step? I am at a loss for how to do this! Any help is appreciated, thanks in advance.
(Also, on a slightly unrelated topic, does anyone know a good software to create album cover? I like to make them for mix cds I make. Name cost, preferably something cheap).
Thanks again!

How would I do so using itunes?
Open the Advanced section of the iTunes preferences and set it not to copy content to the iTunes Music folder when it's added to the library. Alternatively, drag them onto the QuickTime Player in the Dock.
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