Using an external HD for both storage AND Time Machine?

Bear with me guys, I'm not sure where to put this question. I figured that because my Macbook Air (and it's limited storage space) was the reason for my needing an external HD I thought this would be the best place.
My MBA has run out of storage and I bought a Seagate External HD to move my stuff onto. I guess my question is: What's the best way to combine the external HD with the MBA? Here are a few of the things on my mind:
-Most of the space is taken up by my user folder right now such as itunes, photos, etc. If I copy that folder to the external drive it would alleviate a large part of my issue, at least for the time being. Eventually I will hit the storage capacity as I add applications over time I guess, so this is a temporary solution (although I free up 27gb of space this way). Can I designate a folder on the external drive as the default for programs like imovie and iphoto like I can with itunes?
-I KNOW there is a way to set the external drive as some kind of default drive but is this feasible? It would be a hinderance if I needed to have it connected at all times to access even applications (which I assume to be the case?
-I also wondered about partitioning the external HD and using one partition for additional storage and the other for time machine? It's a 1TB hard drive, and I figure I could make a 100GB partition to use with time machine (my MBA only has a 64gb capacity) and use the other 900GB for files. Is this even possible or does time machine need it's very own separate drive?
Anyway, this doesn't necessarily ask many specific questions and I apologize if it appears a little disjointed. I'm looking for help and opinions on the best way to use this new piece of equipment to compliment my MBA. Any thoughts are appreciated.

While it is possible to partition an external drive and use one partition for files and the other for Time Machine, there's actually very little point in doing so. The reason is that in your scenario, you'd be storing all your files on the external, meaning that pretty much all there would be on your MBA internal drive is MacOS and your applications - the very things you can easily restore in the event of failure - while all your files would be on the external, where they are not being backed up.
It is also possible to use an external drive as the boot drive for the MBA (easiest done by cloning the internal drive to a partition on the external, and then setting that partition as the startup drive in the Startup Disk preference pane) but that would still require you to wipe at least some of your files from the internal, and mean that the contents of your external drive are not being backed up. It would also mean that your MBA would run pretty slowly when booted from the external.
Rather better, in my view, would be to use the external as the primary store for all non-essential files - your complete iTunes library and all your documents, files, video, photos etc, and then copy back to the MBA just those items you actually need for any day or week's activities. Then get a second external to use for backing up the first!

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