Dumb question: Can I move my iPhoto, iMovie, iDVD, PSE6 to a external HD

Greetings,

I am not a computer person so my question probably has a very simple solution.

I have an iMac (Intel) with a 500 gig internal HD. I use the iMac for everything, not just iPhoto or iMovie/iDVD. I use a variety of photography software applications ie. Photoshop Elements 6, NIK, DPP from Canon.

I have a 500 gb external HD connected to the iMac and use it for Time Machine to backi up my iMac.

When Time Machine is trying to back up my iMac it says "Time Machine Error. the backup is too large for the backup volume. The backup requires 161.6 GB but only 128.7 GB are available."

Sounds like a waste of 128.7 gb on the 500 gb external HD. But I guess I ran out of sufficient HD space on the external HD? Correct?

Question:

Should I purchase another larger external HD for Time Machine say 1 tb to 2tb, then use the existing 500 gb external HD just to back up my iPhoto and iMovie library?.

And then have iPhoto, iMovie, iDvd on the freed up external 500 gb HD, as well as having all my photograph applications ie. NIK, PSE6, DPP, etc. on external HD. And use that as my primary HD. That would free up space on the internal iMAC HD correct?

I use a Canon 5DMII with 21 mp mostly RAW and HD video so the files are large.

Can it be done, and does it make sense? What would you do?

Thanks for any suggestions.