Small Computer Hard Drive, How do I move my Library to external, Can I?

I have a small 40 gig HD on my laptop. I am transfering my CD's to IPod and it is of course using a lot of my computer hard drive, I will run out before I can transfer all the cd's to it to then have it update my ipod. Can I get an external hard drive and move the library to that and have my Ipod and Itunes pull off the external drive? Anyone know how I can do this?
Otherwise, do I just erase my library in the computer and go to manual update on the ipod so it doesn't erase what I already have on the ipod?

To move all your audio tracks to an ext. hd:
Launch iTunes - Preferences / Advanced: Point the folder that holds your music to folder on your ext disk.
Quit preferences
From iTunes Menu Advanced select "Consolidate Library...."
Now all your music should be copied to your ext. drive.
Verify that all tracks have been copied - then delete your old "iTunes Music" folder.
Don't touch your "Library" files - they can't be moved to an ext drive.

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