Time machine / small ssd

I apologize if I'm asking something that's already been addressed but I have a few questions regarding this.

I got the 11" Mac air with 64gig ssd.
Originally I was going to run my iTunes library on a seperate drive but would that mess up time machine? Obviously I don't need iTunes backed up twice but I don't want to screw anything up either.

Maybe I'm over thinking this because my needs are simple. I used to have a huge library but after multiple PC crashes my library is around 1500 songs, no videos, a few apps, and I plan on using Iwork.

Should I use the small ssd for all of this?

Put iTunes on an external drive and use time machine with a time capsule?

Or something else entirely ?

I just don't want to use space I don't have to and an iTunes library will probably be the most taxing thing on my Mac.

Ok so if I'm understanding correctly I would need 2 external hdd? One for iTunes and one for time machine? Or I could put iTunes and time machine on one hdd without my library on my computer?

Also what is iTunes Match?

Thanks for your help!